Kim and Singal 1993

1

• Kim and Singal (1993)
• Target shareholder wealth could increase due to
• value creation
• wealth transfer (from employees, customers,
  etc.).
• In either case, stock-market performance or
  accounting earnings
• of the combined firm should show improvement.
• How do we distinguish whether target shareholder
  wealth increase
• is due to value creation or wealth transfer?

2
Kim and Singal (1993) How do we distinguish
whether target shareholder wealth increase is
due to value creation or wealth transfer (from
customers)?
P
Q
Marginal Cost
Monopoly Price
Competitive price
Demand
Marginal Revenue
3

• Kim and Singal (1993)
• Page 555 An increase in price (airfare) implies
  that the market-power effect dominates efficiency
  gains a decrease in price implies the dominance
  of efficiency gains.
• Page 556 Fare changes during the announcement
  period (Table 1) are primarily due to the
  market-power effect, whereas the fare changes
  during the completion period reflect the joint,
  and offsetting, effects of market power and
  efficiency gains.

4

• Kim and Singal (1993)
• Summary of Main Findings (Page 567)
• Routes affected by mergers show significant
  increases in airfares relative to control group.
• Price increases positively correlated with
  changes in concentration.
• Price increases positively correlated with
  distance of routes (airlines exploit greater
  market power on longer routes for which
  substitution by other modes of transport is less
  likely).
• For normal firms Effect of increased market
  power takes place during merger discussions. In
  mergers with common hubs and overlapping service,
  efficiency gains kick in after merger completion.
• When target firm is in financial distress
  Airfare reduction during merger discussion, but
  drastic fare increase after merger completion.
• When merging firms have neither common hubs or
  overlapping service Efficiency gains unlikely.
  Exercise of market power during discussion and
  after completion of merger Multimarket contact

5

• Akhavein-Berger-Humphrey (1997) Bank Mergers
• Summary of Main Findings (p. 132)
• No improvement in cost efficiency of merging
  banks.
• Improvement in profit efficiency of merging banks
  due to shift in outputs from securities to loans.
  Shift in product mix may occur because merging
  banks have improved diversification of risks
  (from loans) that allow a higher loan/asset ratio
  - without an increase in the equity/asset ratio.
  Capital markets restrict banks from taking
  substantial additional risks without increases in
  equity.
• Improvement in efficiency after the merger is
  higher if either or both of the merging firms
  have low efficiency prior to merger. The merger
  may have the effect of waking up management or
  be used as an excuse to implement substantial
  restructuring and efficiency improvements to
  increase the profitability of both parts of the
  combined institution.

6

• Akhavein-Berger-Humphrey(1997) Bank Mergers
• Summary of Main Findings (continued) (p. 132)
• Market power effects of megamergers in banking
  are very small.
• On average, both loan and deposit prices fall by
  statistically insignificant less than 7 basis
  points.
• Changes in local market concentration from
  megamergers quite small on average even for
  mergers between banks with substantial market
  overlap prior to merger.
• Above findings suggest that public policy (DOJ
  and FTC) may have been successful in preventing
  mergers that would bring about large increases in
  concentration or market power.
• Has this policy also prevented mergers that might
  have increased efficiency substantially?
• Berger et al (1999) page 154-155
• Above study did not focus on mergers involving
  substantial increases in local market
  concentration. Bank mergers that involve
  increases in market concentration severe enough
  to violate the DOJ bank merger guidelines
  substantially reduced deposit rates paid by the
  merger participants, consistent with market power
  effects.
• Bank mergers that do not involve significant
  increase in concentration had no significant
  effect on deposit rates.

7

• Akhavein-Berger-Humphrey (1997) Bank Mergers
• Caveats (p. 135)
• Study may not generalize to mergers other than
  banking megamergers of the 1980s.
• Greater cost efficiency in other industries?
• Greater cost efficiency in bank mergers in 1990s
  because of increased emphasis on cost cutting?
• More market power effects in mergers of smaller
  banks which tend to occur in more concentrated
  local markets?