The Impact of Bank Holding Company Consolidation: Evidence from Shareholder Returns

by Gary Whalen Many states have chosen to legally restrict intrastate branching by banks to some degree. In a large proportion of such states, banks are able to circumvent the prohibition on statewide branching because they are permitted to adopt a multibank holding company (MBHC) form and to acquire affiliate banks throughout the state. However, because subsidiary banks in a MBHC continue to be separately incorporated enti ties, and because a number of legal-regulatory impediments to full organizational integration exist, it has been argued that MBHCs are imperfect substitutes for branch banking systems? That is, MBHCs may be less able to exploit size-related economies than pure branch banking organizations. On the other hand, researchers such as 0. Williamson have argued that it might be optimal for relatively large firms to operate as multi-divisional holding companies, rather than to merge all operating units into a single ~ubsidiary.~ Beginning with New York in the mid-1970s, a number of states have amended their branching laws to permit MBHCs to transform their affiliates into branches by merging them into one large bank subsidiary (or several large ones). Interestingly, in states where such activity has been authorized, MBHCs have chosen to consolidate their subsidiary banks in varying degrees suggesting that the management of competing companies disagree about the expected net benefits of consolidation or, alternatively, about the costs of retaining the MBHC form.3 No empirical evidence currently exists on the net benefits of holding company consolidation. Such evidence could be of value because legislation authorizing such activity is currently being considered in several states. Measurement of the impact of total consolidation on the equity value of the consolidating MBHC is the subject of this study.4 In brief, the expected net benefits of consolidation are inferred by examining the behavior of the daily stock returns of a sample of 21 bank holding companies in seven states when the intention to merge their affiliates is first announ~ed.~ The behavior of their stock returns