Doctoral Dissertations

Date of Award

3-1984

Degree Type

Dissertation

Major Professor

George C. Philippatos

Committee Members

Judy Perkins, Robert Weir

Abstract

The purpose of this study was: (1) to determine the cost savings available to acquiring savings and loan associations through the existence of economies of scale and to determine to what extent, if any, acquiring savings and loan associations face a long-run average cost curve different from the rest of the population and, (2) to determine what changes in efficiency occur as a result of merger. The long-run average cost curves were estimated for all acquiring, acquired and nonmerging savings and loan associations as well as for the entire population in the ten semiannual time periods between 1977 and 1981. A sample was chosen that was composed of 119 of the 228 mergers between savings and loan associations that occurred between June 1978 and June 1981. For each merger included in the sample, both the acquiring and acquired savings and loan associations were paired with nonmerging savings and loan associations with similar characteristics. These pairing characteristics were: geographic location, form of ownership, type of charter, number of offices and size.

The data used in this study consisted of operational and financial information of all insured savings and loan associations and state per capita annual income. The information concerning savings and loan associations was furnished by the Federal Home Loan Bank Board and the personal income data was made available by the Commerce Department.

The long-run average cost curves for each group were estimated using translog regression equations. The underlying assumption of the model was that savings and loan associations attempt to minimize costs.

The measures of efficiency used in the analysis of mergers were X-inefficiency and the operating expense ratio. The former is defined to be the ratio of excess costs to actual costs while the latter is the percentage of total assets comprised by operating expenses.

This investigation concluded: (1) There existed unexploited economies of scale for all segments of the population of savings and loan associations during the period of time studied, (2) Acquiring savings and loan associations faced a long-run average cost curve that lay significantly above that of the rest of the population, (3) In contrast, acquired savings and loan associations' long-run average cost curve was beneath that of the rest of the population, (4) The largest potential cost reductions were for smaller asset sized associations in all segments of the population.

With respect to the impact of merger on efficiency, it was determined that non-synergistic combinations of the merging firms are less efficient 18 months prior to the merger than a similar combination of their matched counter parts. The merger event exacerbated the difference in efficiency through what has been called the digestion effect. However, within 18 months after the merger, the difference in efficiency lessened.

To the extent that exploitable economies of scale exist, these results lend support to the Federal Home Loan Bank Board policy goal of moving towards a smaller number of more efficient savings and loan associations. Additionally, to the extent that the promerger policy of the Federal Home Loan Bank Board represents the vehicle chosen to attain the aforementioned goal, the results of this study suggest that the promerger policy should be viewed with a great deal of caution.

Future research in this area should include a stratification of mergers into voluntary and supervisory categories as well as a mutual and stock classification. Additionally, the translog model used suffers from multi-collinarity. A reformulation of the model may be required. Finally, the data furnished for this study, while generous, was incomplete. Additional performance data should increase the robustness of the results.

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