The role of capital in bank acquisitions

This study examined motives for bank acquisitions based on capital considerations and related these motives to postacquisition changes in the capital positions of acquired banks, it consisted of two components: (1) A preacquisition test which used a multinomial logit model to compare the capital positions and other characteristics of a sample of acquired and nonacquired banks; and (2) a postacquisition test which used a multiple regression model to analyze changes in the capital positions of acquired and nonacquired banks.

The study employed a unique construction of the capital variable which allowed for the simultaneous existence of motives for acquisition based on both high and low capital ratios for the acquired bank. The sample consisted of 140 banks acquired in 1982 and 1983 in seven unit banking states and 3856 nonacquired banks in the same states.

Preacquisition results provided relatively strong evidence that high capital ratios are a motive for acquisition and weaker evidence that low capital ratios are a motive for acquisition. Postacquisition results show that banks likely to have been acquired because of a high capital ratio experience a relative decrease in capital levels subsequent to acquisition, while banks likely to have been acquired because of a low capital ratio experience a relative increase in capital levels subsequent to acquisition.