How Do Stock Markets in the US and Europe Price Efficiency Gains from Bank M&As?

This paper examines whether the stock markets price changes in operating efficiency as a result of bank mergers and if the premiums paid by the acquiring banks also reflect these changes. The sample covers mergers and acquisitions consummated in the US and Europe during the period of 1997 to 2003. Changes in cost and profit efficiency are calculated using the non-parametric Data Envelopment Analysis (DEA) method 1 year prior and 3 years following the merger announcement. Evidence suggests a significant relation between the announcement-period abnormal returns and the post-merger profit efficiency changes. Results also indicate that bank managers are likely to pay a higher premium for those M&A transactions that can bring about greater efficiency gains, particularly on the profit side. Further, although acquirer shareholders in the US and Europe appear to react differently to the announcement of a bank merger, our results for target shareholders suggest that regional differences might be less important than the degree of capital market development in explaining wealth effects.