The Determinants of Bank Mergers: A Revealed Preference Analysis

Oktay Akkus∗, J. Anthony Cookson†and Ali Hortaçsu‡

June 26, 2014

Abstract

We provide new estimates of merger value creation by exploiting revealed preferences of

merging banks within a matching market framework. In our analysis of bank mergers, we find
that merger value arises from cost efficiencies in overlapping markets, relaxing of regulation,
and network effects exhibited by the acquirer-target matching. In contrast, we find that merger
value creation is unrelated to acquirer overvaluation and performance, suggesting that mergers
in our sample are not motivated by free cash flow. Consistent with this interpretation, we
estimate that only six percent of mergers destroy value, reducing overall merger value by less
than one percent.

∗ BatesWhite Economic Consulting

† University of Colorado at Boulder - Leeds School of Business. Corresponding author. tony.cookson@colorado.edu.
‡ University of Chicago - Department of Economics.

Electronic copy available at: http://ssrn.com/abstract=2459727

Introduction

Understanding merger value creation is critically important for the shareholder value at stake, but also because how

merger value is created has important implications for the nature of competition and consumer well-being (e.g.,

see Bernile and Lyandres, 2010). The value arising from mergers is also an important indication of the quality of

corporate governance (e.g., see Harford et al., 2012). Despite the pervasive use of merger value creation measures,

the typical proxy for the value created in a merger, announcement stock returns for the acquirer, is only partly

driven by value creation because a merger announcement also induces investors to re-evaluate the acquirer’s stock

in light of the decision to merge (Bhagat et al., 2005; Bayazitova et al., 2012). Although recent work has sought

better measurement of value creation, the proposed adjustments to announcement returns still rely heavily on stock

market reponses, and thus, investor motives play a continuing role. An ideal measure for the value created by

mergers should not depend on investor motives that are unrelated to fundamental value creation.

In this spirit, we develop a novel approach to estimate merger value creation that is immune to investor mo-

tives because it relies on the choices of the merging firms directly. Our technique is based on modeling merger

activity as a two-sided matching market equilibrium between acquirers and targets (e.g., see Becker, 1973; Roth

and Sotomayor, 1990). Specifically, we estimate merger value using a structural method that explicitly relies on

the equilibrium conditions of the merger market. Our approach avoids having to correct for revaluation because

we directly estimate merger value creation in a structural model without relying on stock returns, rather we infer

what determines merger value from revealed preference - i.e., the choices that acquirers and targets make within

the context of the matching market. In outlining a new method to estimate value creation in merger markets, our

approach is complementary to recent work that has proposed revaluation corrections to announcement returns.

Although our insights extend to the merger market more broadly, we focus our empirical analysis on the bank

merger market, employing comprehensive merger-level data from 1995 until 2005 in our study of the determinants

of bank merger value. We focus on bank mergers because it is straightforward to define the scope of the match-

ing market within a narrowly-defined industry such as banking. This is especially true during our sample time

frame (1995-2005), the decade following the elimination of cross-state branching restrictions (Riegle-Neal Inter-

state Banking and Branching Efficiency Act 1994).1 We use this cross-state standardization of merger regulations
1 The 1994 Riegle-Neal Interstate Banking and Branching Efficiency Act effectively standardized the state-by-state deregulation in
branching rules that had been taking place over the previous two decades. After the Riegle-Neal Act, the U.S. banking industry con-
solidated considerably, in large part due to the merger wave we study. Specifically, the total number of banking institutions in the United
States declined from 10,416 to 7,582 in the decade following Riegle-Neal (FDIC Summary of Deposits, 1995 – 2005). For a complete
historical account of this deregulation process as well as a comprehensive empirical analysis of its determinants, see Kroszner and Strahan
(1999).

Electronic copy available at: http://ssrn.com/abstract=2459727

to motivate our treatment of mergers in the U.S. banking industry as a national merger market that takes place each

year.

In our empirical analysis, we recover a structural merger value function that accounts explicitly for the endoge-

nous matching process, and thus, can be used for causal inference. We use our approach to study how features of

the acquirer and the target institution affect the value of the bank merger. According to industry sources, an impor-

tant reason for banks to merge during our sample was to capitalize on economies of scale. As a 1998 article in the

San Francisco Chronicle noted, “A bigger bank can acquire customers more cheaply by marketing on a national

scale, and can reduce risk by diversifying geographically” (Marshall, 1998).2 In a two-sided matching market,

these factors suggest that large banks derive more value from larger target banks, and would tend to generate a

positive assortative match in bank size. Our framework naturally accounts for this cost advantage of large banks by

including terms in the match value function that capture the interaction between the size of the acquirer and target

banks.

Our main specifications quantify the effect on merger value of cost efficiencies of various types (e.g., merging

to a more efficient scale and capturing economies of scope in nearby markets), as well as merger value derived

from additional market power. Our structural approach accounts for these explanations by defining a merger value

function that explicitly depends on market concentration and the overlap between acquirer and target markets. We

also include measures of performance and valuation of the target and acquirer banks to evaluate how acquirer

overvaluation (Jensen, 2004) or acquirer and target performance (Maksimovic and Phillips, 2001) relate to value

creation. Throughout our empirical exercise, we find that the mergers we study were primarily motivated by

efficiencies, cost reductions or reducing inefficiencies from previous regulations, and that market concentration

(measured by a Herfindahl index) also contributes positively to the value of the merger. On the other hand, we find

little evidence that mergers were motivated by high (or low) performing target banks. Our evidence also suggests

value creation is unrelated to the acquirer’s pre-merger efficiency, loan loss reserves, or market overvaluation.

Consistent with an efficiency rationale for value creation, we find that merger value is greater when there is a

greater overlap between acquirer and target markets, and that these gains are greater for mergers between banks

regulated by the same agency before the merger. These effects likely represent efficiencies rather than market power

because we also control for market concentration in the target’s markets in these specifications. The magnitude of
2 Using data from the pre-Riegle-Neal era, Kroszner and Strahan (1999) demonstrate that new banking technologies for both deposit-

taking and lending increased the geographic scale of banking. Our sample time frame (1995 – 2005) occurs during a period of rapid
innovation in Internet technology, which increases the efficient scale of banking beyond the ATM and credit history technologies described
by Kroszner and Strahan (1999). Thus, economies of scale are as relevant for bank mergers in our time period as they were for the geographic
scale of banking in Kroszner and Strahan (1999).

2
these efficiency effects on merger value are sensible, amounting to nearly the annual administrative cost of operating

a single bank branch (Radecki et al., 1996). These efficiencies may arise from the ability of the combined bank to

pool fixed operating expenses such as advertising and ATM networks across the acquirer and target banks.3

Our work also sheds light on the effects of banking deregulation by studying mergers in the post-Riegle-Neal

banking industry. Early work on banking deregulation focused on how deregulation affects aggregate measures of

economic activity such as state per capita income growth and its volatility (Strahan, 2003). More recent work has

turned to study deregulation’s competitive effects on small-firm finance and innovation (Rice and Strahan, 2010;

Cornaggia et al., 2013). We deepen existing work on the outcomes of banking competition by studying the value of

bank mergers at the merger level. When we aggregate to the entire banking industry, we estimate significant value

generated from the increased merger activity during our post-Riegle-Neal sample, a new and novel quantitative

indication that the prohibition of banking and branching across state lines was costly.

In addition, we also include other features of banking regulation in our specifications for the merger value

function. In particular, we allow the merger value function to depend on whether the acquirer and target have

different banking charters, and thus, report to different regulatory agencies before the merger. By including this

information in the merger value function, we recover the implicit costs of diverse chartering regulations from the

pattern of mergers. In this way, our results speak to the effects of inconsistent regulators, and are complementary

to the evidence presented by Agarwal et al. (2012). In a counterfactual exercise, we find that overall match value

created by mergers would be 20 to 50 percent higher per year if all banks were of the same charter type. This

result suggests that there are significant frictions in the bank merger market imposed by regulation. Once we

rescale our estimates by the fraction of banks that merge in a typical year, our counterfactual-estimated cost of

bank chartering regulation equals 1 to 2.5 percent of the value of the entire banking industry, and this estimate is

similar in magnitude to annual supervisory costs (Whalen, 2010).

Using the structural merger value function to estimate the value produced from each merger, we estimate an

annual average of 6.02 percent of mergers destroy value in our sample, and these mergers destroy value amount-

ing to less than one percent of merger value created for each year in our sample, a magnitude similar to recent

work by Bayazitova et al. (2012). Our estimate of the extent of value-destroying mergers is conservative because

some fraction of the realized negative merger values is likely due to sampling variability. We assess the role of
3 Viewed from the perspective of the banking literature, these findings provide an external check on previous work that evaluated market

power versus branching efficiency motives for bank mergers using stock market evidence (Rhoades, 1994; Seims, 1996). Notably, the
existing literature documents a takeover premium for acquired firms as in the broader merger literature (Rhoades, 1994; Eckbo, 2009),
mergers do not appear to lead to significant changes to market concentration, and that there appears to be an efficiency motive for mergers
between banks with significant overlap in markets (Seims, 1996).

3
sampling variability as an explanation for the observed value destroying mergers by computing an equilibrium of

the matching model that assumes acquirers and targets reallocate optimally, given the structural merger value func-

tion we estimate.4 This exercise allows us to recover the fraction of value-destroying acquirers, or acquirers that

would generate negative merger value, even in the optimal pattern of mergers. Using this approach, our estimate

of the frequency of value-destroying acquirers is 2.94 percent annually. The small magnitude of these estimates

implies that the scope is quite small for value-destroying mergers that occur for reasons outside of factors explicitly

modeled in our merger value function – notably, behavioral theories of merger value destruction, and unobserved

agency frictions.

Because our approach takes the matching equilibrium seriously, the estimated match value function we obtain

can be used to predict bank mergers, even after the policy environment changes. A structural approach like ours is

particularly useful because matching market equilibria are sensitive to small perturbations in payoffs and changes

in the policy environment. In these cases, structural estimates can be used to more reliably predict merger outcomes

than analogous reduced form approaches. Indeed, the predictive strength of our structural method is borne out in

the data. We compare the one-year-ahead predictive accuracy of our structural method to a reduced form predictive

regression that uses a binary logit and the predictors that make up our match value function. We find that our

revealed preference method dramatically outperforms standard predictive regressions, allowing us to more reliably

predict mergers one year ahead than a binary logit approach. On this basis, our method represents a dramatic

improvement over reduced form predictive regressions.5

As our main findings demonstrate, our estimation of merger value creation and its determinants has a number

of features that set it apart from notable alternatives. First, our revealed preference method does not make any

assumption about the behavior of investors or timing of market information in order to quantify the merger value

creation. Second, because the method does not rely on stock market data, our revealed preference method can be

applied to mergers between two private entities when mergers and characteristics data for private-to-private mergers

are available, expanding the potential scope of analysis and inference.6 Third, the structural model of merger value
4 Specifically, we use the structural merger value function to compute the merger value from any possible acquirer-target pair, and use
these merger values to calculate the implied optimal pattern of mergers. In this optimal reallocation of acquirers and targets, the fraction of
acquirers that go unmatched represents value-destroying mergers that are not attributable to optimization error.
5 Although our method requires relatively few assumptions, a notable assumption we employ to apply our model to the bank mergers

setting is that the bank merger market is national immediately after the Riegle-Neal Act passed. This assumption is not literally true because
some states lagged in their official adoption of the law’s provisions (see Johnson and Rice, 2008). We address this concern about the validity
of our assumption and robustness of our method by estimating the match value function in each year of the sample. We the predictive
accuracy of our structural method outperforms the baseline binary logit predictive accuracy in every year of our sample (even in earlier
years), suggesting that to the extent the assumption is violated, the advantages of our structural method outweigh the costs.
6 Maksimovic and Phillips (2001) suggest an alternative method for evaluating the value of mergers that does not rely on stock mar-

ket information, but uses productivity measures instead. Our method shares this advantage without requiring a reliable measurement of

4
creation facilitates a direct assessment of the degree of optimization error in the choice of merger targets, and a

straightforward quantification of the fraction of value destroying mergers. Finally, our structural method allows for

a more accurate forecast of merger activity than alternative methods to predict mergers.

Our work also relates to a growing literature in industrial organization that employs revealed preference meth-

ods (e.g., Aguirregabiria et al., 2012). Notably, Chen and Song (2013) apply the Fox (2010a) estimator to the

matching between banks and firms, and find evidence of a positive assortative match between banks and firms.

To the extent that firms’ linkages with target banks are persistent, we should expect that these characteristics of

bank-firm matching would be relevant to acquirer-target bank matching, which is our focus. Indeed, that larger

targets likely have larger firms as clients is one reason to expect that acquirer and target banks mergers will also

exhibit the positive assortative match we document here.

More generally, our paper contributes to an increasingly-important segment of the empirical finance literature

that explicitly addresses endogeneity in financial markets research (Roberts and Whited, 2012). In the last decade,

structural approaches have yielded new insight into a wide variety of topics in finance, including debt dynamics,

corporate cash holdings, and the role of venture capital firms (Sorensen, 2007; Hennessy and Whited, 2005; Boileau

and Moyen, 2009). Relative to existing structural work in finance, our paper employs relatively few assumptions

to recover a structural value function. As a result, our method is conceptually straightfoward, and similar methods

to ours should find fruitful application to address important questions in financial economics.

The remainder of the paper is structured as follows. Section 1 presents our revealed preference method, and

uses Monte Carlo experiments to evaluate the estimator’s small sample properties. Section 2 describes the data and

basic summary statistics. Section 3 motivates and describes the form of our specifications. Section 4 is a discussion

of the main results on value creation and the determinants of value creation. Section 5 discusses in-sample and

out-of-sample performance, compares to relevant alternatives, and presents a counterfactual simulation. Section 6

concludes.

1 The Revealed Preference Model

When analyzing merger value, it is instructive to observe that each acquirer deliberates among a number of viable

alternative targets, and each target considers viable offers from a number of alternative acquirers. In practice,

targets often entertain multiple takeover bids at the same time (e.g., see Bhagat et al. (2005)), but these offers
productivity.

5
need not be explicit to matter for the merger market decisions of targets and acquirers. Through this equilibrium

channel, the values of feasible alternative matches - both implicit and explicit offers - provide a lower bound for the

value of each realized merger. Our revealed preference approach formalizes this intuition by explicitly using the

characteristics of each bank’s alternative matches together with the observed acquirer-target transfers to estimate

the value of the mergers that do occur.

In our model of bank mergers as a two-sided matching game (Roth and Sotomayor, 1990), the merged acquirer-

target pair realizes a joint match value, which is split using an equilibrium transfer from the acquirer to the target.

Each bank matches with the bank on the other side of the market that maximizes its individual payoff. In equilib-

rium, matched banks receive a higher payoff from the observed match partners than they could get from counter-

factual partners.

In the model, we construct many possible counterfactual matches to each observed match within a matching

market, yielding many inequalities in the structural match value for each observed match. Given these inequalities

and a parametric form for the match value function, we choose the parameter vector that maximizes the fraction

of inequalities that hold. This is the maximum score estimator, which Fox (2010a) proved to be consistent for

matching games given a rank order condition (as in Manski (1975; 1985)).7 Building on Fox(2007; 2010a; 2010b),8

we develop a maximum score estimator that incorporates acquirer-target transfer data. Transfer data allow the

maximum score estimator to produce estimates on an interpretable scale, which is advantageous for understanding

the determinants of merger value creation.9

1.1 Matching Model

For a total number of My matches in matching market y, we denote acquirers by b = 1, ..., My and targets by

t = 1, ..., My . We assume there is one national merger market per year and markets in different years are independent

of one another. The merged pair (b,t) realizes a post-merger value f (b,t), which is the summation of the individual

payoffs to the acquirer and target, f (b,t) = Vb (b,t) +Vt (b,t).

7 Fox (2010a) made separate consistency arguments for one large matching market and many independent matching markets. In the U.S.

bank mergers setting for our sample time frame, we have 11 distinct matching markets, one for each year. We view each annual matching
market as a large matching market in the sense of Fox (2010a)’s one matching market asymptotic result, and the fact that we observe mergers
for multiple years allows us to estimate the match value function with even greater precision. Nevertheless, our year-by-year results rely
more explicitly on the assumption of a large matching market that meets each year.
8 The maximum score estimator proposed by Fox (2007) does not use data on transfers. The fact that the estimator works when transfer

data are not available is an advantage if no data on transfers are available, which is true in many matching contexts.
9 In addition, we demonstrate that for parameters that are identified using the without-transfers estimator of Fox (2010a), our estimator is

more precise. We also demonstrate that our method identifies parameters that cannot be identified without transfer data, e.g., the sensitivity
of the match value function to a change in some characteristic of the target bank.

6
 The payoff to the acquirer Vb (b,t) is the post-merger value minus the acquisition price pbt paid to the target,

f (b,t) − pbt . The target’s payoff Vt (b,t) equals the acquisition price pbt . Each acquirer b maximizes Vb (b,t)

across targets. Each target t maximizes Vt (b,t) across acquirers. In the matching equilibrium, every bank derives

higher value from the observed acquirer-target match than from any counterfactual match. This revealed-preference

insight gives inequalities that we use in our estimation. For example, if acquirer b is matched with target t while

target t 0 could have been acquired by acquirer b, we infer that b derives more value from being matched with t than

with t 0 , which gives the condition:

Vb (b,t) ≥ Vb b,t 0

f (b,t) − pbt ≥ f b,t 0 − pbt 0

(1)

The transfer from acquirer b to target t 0 pbt 0 is not available from data on observed matches, but in equilibrium,

each target t receives an offer that is the same across acquirers. For acquirer b to acquire target t, the offer pbt

from acquirer b must be weakly greater than the offer pb0t from a competing acquirer b0 . Acquirer b’s equilibrium

offer will not be strictly greater than the alternative because higher offer prices reduce acquirer b’s payoff. Hence,

pbt 0 = pb0t 0 and the inequality in (1). The same logic applies to acquirer b0 , yielding the inequalities:

f (b,t) − f b,t 0 ≥ pbt − pb0t 0

(2)

f b0 ,t 0 − f b0 ,t ≥ pb0t 0 − pbt



(3)

The inequalities have a natural interpretation. For example, (2) means that the extra value that acquirer b derives

acquiring target t rather than target t 0 exceeds the extra expense of acquiring target t rather than target t 0 . Equations

(2) and (3) are useful if we have data on transfer amounts, but these data are often unavailable. In the absence of

transfer data, we can add these inequalities to obtain a single inequality that does not rely on data from transfers:

f (b,t) + f b0 ,t 0 f b0 ,t + f b,t 0




≥ (4)

This inequality implies that the total value from any two observed matches exceeds the total value from two

counterfactual matches constructed by exchanging partners.

7
1.2 Estimation of the Matching Model

Let εbt be a match-specific error that affects the value to acquirer b matching with target t. Then, acquirers and

targets match to one another according to the match value function F (b,t) = f (b,t)+εbt . As each acquirer can only

acquire one target, the acquirer’s choice among targets is a discrete choice. As a simple semiparametric technique

to estimate this discrete choice, we turn to maximum score estimation.10 Fox (2010a) developed a maximum score

estimator that makes use of inequality (4). Specifically, given a parametric form for the match value function

f (b,t|β ), one can estimate the parameter vector β by maximizing:

Y My −1 My
1 f (b,t|β ) + f b0 ,t 0 |β ≥ f b0 ,t|β + f b,t 0 |β




Q (β ) = ∑ ∑ ∑ (5)
y=1 b=1 b0 =b+1

 
over the parameter space for β . For a given value of the parameter vector β̃ , Q β̃ is the number of times

the inequality (4) is satisfied. The maximum score estimator β̂ , therefore, maximizes the number of times that this

inequality holds among the set of inequalities considered.11

Although attractive in its simplicity, the maximum score estimator based on (4) does not make use of transfer

data, which may significantly improve the performance of the estimator. Moreover, acquirer-specific or target-

specific attributes cancel out when we adding the inequalities (2) and (3) together to obtain (4). Therefore, any

parameters that measure the sensitivity of the match value function acquirer- or target-specific attributes cannot be

identified with maximum score estimation based solely on without-transfers information.

Both to improve the precision of the estimator and to identify the effect of acquirer-specific and target-specific

attributes, we develop two related estimators that use transfer data, which we call the with-transfer estimator 1

(WT1) and with-transfer estimator 2 (WT2). We call the maximum score estimator based on equation (4) the

no-transfer-data (NTD) estimator.

For the same pairwise comparisons used to form the objective function for the NTD estimator, the WT1 estima-

tor imposes the inequalities (2) and (3) simultaneously. If both (2) and (3) hold, (4) holds as well, but the converse
10 If we assume that the match-specific errors εbt are distributed iid Type 1 extreme value, the model reduces to the familiar multinomial
logit model. A significant weakness to the multinomial logit approach is that imposes a restrictive set of substitution patterns, for example,
the red-bus blue-bus problem (McFadden, 1974; Debreu, 1960). An acquirer should be more likely to substitute between similar targets, yet
the multinomial logit model does not easily allow for this type of substitution. We explicitly contrast the performance of the multinomial
logit to our maximum score technique in Appendix (A.1). The appendix also considers another alternative, one-sided matching. In both
cases, our two-sided matching method that uses maximum score estimation is preferable.
11 Fox demonstrates that one need not consider all possible inequalities to obtain a consistent estimator, but merely form a large subset

of all possible inequalities. Fox (2010a) shows that the maximum score estimator β̂ is consistent if the model satisfies a rank order
property (as in Manksi (1975; 1985)) for matching games – i.e., the inequality in equation (4) implies P [b acquires t and b0 acquires t 0 ] ≥
P [b acquires t 0 and b0 acquires t]. In addition to providing intuition for conditions under which the maximum score estimator should be
used, this strong version of the rank order property is used in the identification arguments given by Fox (2010b).

8
is not true. The WT1 estimator maximizes the objective function:

Y My −1 My
Qtr (β ) 1 f (b,t|β ) − f b,t 0 |β ≥ pbt − pb0 t 0 ∧ f b0 ,t 0 |β − f b0 ,t|β ≥ pb0 t 0 − pbt




= ∑ ∑ ∑ (6)
y=1 b=1 b0 =b+1

An alternative approach to incorporating transfer information is to use inequalities (2) and (3) separately when

forming the objective function. This WT2 estimator maximizes the objective function:

Y My −1 My
Qtr (β ) 1 f (b,t|β ) − f b,t 0 |β ≥ pbt − pb0 t 0 + 1 f b0 ,t 0 |β − f b0 ,t|β ≥ pb0 t 0 − pbt

 



= ∑ ∑ ∑ (7)
y=1 b=1 b0 =b+1

1.3 Monte Carlo Evidence on Maximum Score Estimators

Our with-transfer estimators are similar in spirit to the NTD estimator, but the addition of transfer data can signifi-

cantly improve the performance of maximum score estimation. We demonstrate this advantage in two Monte Carlo

experiments.12

We employ Monte Carlo experiments rather than formal derivations because Manski (1975)’s rank order con-

dition is not guaranteed to hold if there is an unobserved component of the match value function, even if this

unobserved component is independently and identically distributed. This is not a feature unique to our setting as

it is true for the NTD estimator that Fox (2010a) develops. In the case of our with-transfers-data estimators, we

have another reason to present Monte Carlo exercises; namely, we do not offer an analogous rank order property

that guarantees consistency for the estimators that use transfer data.13 Nevertheless, as our Monte Carlo exercises

demonstrate, the maximum score estimators – especially, the estimators that use transfer data – have a number of

strengths relative to alternative techniques.

1.3.1 Data Generating Process

We simulate data on acquirer and target attributes and use a match value function with a known functional form to

generate match values for each possible acquirer-target pair. Consistent with the previous section, we add an iid

match-specific error to each match value. As proposed by Shapley and Shubik (1971), we solve the social planner’s
12 Our findings are broadly similar to those found in Fox and Bajari (2013), which replicated many of the results found in an earlier draft
of our paper.
13 In our inequalities, the choice of acquirer b to acquire target t depends not only on the match values f (b,t) and f (b,t 0 ), but also on

both equilibrium transfer amounts pbt and pb0 t 0 . Because the choice probabilities depend directly on continuous equilibrium prices in our
with-transfers-data setting, it is much more difficult to write down a rank order condition that depends solely on primitives. For this reason,
our argument for the desirability of our with-transfers-data estimators relies heavily on the Monte Carlo evidence.

9
problem to determine the equilibrium one-to-one matching function m (b,t):

My My
max
m(b,t)
∑ ∑ m (b,t) F (b,t) (8)
b=1 t=1

subject to nonnegativity constraints 0 ≤ m (b,t) for all b and t, and the constraint that each agent may have at most

one match, ∑t m (b,t) ≤ 1 for all b and ∑b m (b,t) ≤ 1. for all t. The solution to this linear programming problem

gives m (b,t) = 1 if acquirer b and target t are matched and m (b,t) = 0 if they are unmatched.14 We solve the

dual to this linear programming problem to obtain the equilibrium acquisition prices. For target t, the equilibrium

acquisition price pt = pbt equals the shadow price on the constraint that the target t may be acquired by at most one

acquirer.

With the implied matches, we form a data set that includes only matched acquirers and targets, their attributes

and the acquisition prices implied by solving the dual to the social planner’s problem. We solve numerically to find

the global maximum of (5) for the without-transfers estimator and (6) for the with-transfers estimator.15

1.3.2 Performance of Estimators on an Interactive Model

Our first Monte Carlo experiment compares the with-transfer estimators to the NTD estimator if acquirers and

targets use the matching function F (b,t) = Ab At + β1 Bb Bt + εbt where the match-specific error εbt ∼ N (0, σ ).

For the Monte Carlo experiments, we set β1 = 1.5. In this functional form, (Ai , Bi ) is a vector of attributes (for
 
Ai
either target t or acquirer b) that is jointly distributed as a multivariate normal random vector   with mean
Bi
   
10 1 0.25
µ =  and variance-covariance matrix  . Attributes for acquirers are distributed independently
10 0.25 1
of attributes for targets prior to solving for the optimal matching and equilibrium transfers.

The bias and root mean squared error (RMSE) based on the 100 replications of estimator for σ ∈ {1, 5, 20}

are presented in Table 1, which confirms that the maximum score estimators that employ transfers data have much

better properties than the NTD estimator that does not exploit transfers data - lower bias16 and RMSE regardless of
14 Shapley and Shubik (1971) proved that we can solve the general problem, which allows for fractional matchings, without loss of
generality. The optimal solution to this problem will not involve fractional matches.
15 Specifically, we employ a classical differential evolution algorithm. Differential evolution is an attractive optimization technique when

the objective function is not well behaved (i.e., not differentiable and potentially having many local optima) and when the objective function
is costly to compute, as it is here (Storn and Price, 1997). For each replication in the Monte Carlo exercise, we give the differential
optimization routine a parameter search space of [0, 50] for each estimated parameter.
16 The differential evolution optimization technique always obtains a solution, even if the parameter vector is unidentified. In the uniden-

tified case, the parameter estimate is a random draw from the parameter search space. In our Monte Carlo exercise, we allow the algorithm
to search over [0, 50] while the true parameter value is 1.5. As a result, unidentified parameters in our technique tend to return values near
25, the middle of the parameter search interval, which results in bias in the Monte Carlo exercise. In practice, unidentified parameters will

10
the amount of unobserved variability considered. When the error standard deviation is large, the without-transfers

estimator has unsatisfactorily high bias and RMSE. This Monte Carlo experiment suggests that in this situation,

the with-transfers estimators will have lower bias and RMSE and that we should impose the two inequalities

simultaneously for better performance.

1.3.3 Performance of Estimators on a Model with a non-interacted term

Our second Monte Carlo experiment compares the with-transfer estimators to the no-transfer-data estimator if

acquirers and targets use the matching function F (b,t) = β0 Ab At + β1 Bb Bt + β2Ct + εbt where the match-specific

error εbt ∼ N (0, σ ). For the Monte Carlo experiments, we set β0 = 1, β1 = 1.5 and β2 = 2. In this functional form,

(Ai , Bi ) is a vector of attributes with the same distribution as the first Monte Carlo experiment and Ct is an attribute

of the target firm that is distributed normally with a mean of 10 and a standard deviation of 1.

For each estimator and each standard deviation of the error term σ ∈ {5, 20}, we perform 100 replications.

The bias and root mean squared error based on the 100 replications of NTD and WT1 are presented in Table 2.17

In addition to estimating the model with the non-interacted term using the with-transfers estimators, we produce

estimates from a misspecified model using the NTD estimator. We do this because, for this matching function, the

inequalities for the NTD estimator given in equation (4) do not allow us to identify β2 because adding equations

(2) and (3) together trivially differences out the β2Ct term.18

As in the first Monte Carlo experiment, the with-transfers estimator is more precise than the without-transfers

estimator. In this case, the maximum score estimator produces estimates tightly clustered around the true parameter

values for all three coefficients, exhibiting low median bias in both the low variance and high variance cases.

Moreover, the estimator appears to be well-identified.19 In addition to added precision, the Table 2 results indicate

that the with-transfers estimator is able to identify parameters on non-interacted terms (in this case, β2 ) whereas

the without-transfers estimator is unidentified in this case.

Taken together, our Monte Carlo simulations confirm two main advantages of using the with-transfers estimator.
also exhibit bias because (almost surely) the researcher-chosen parameter space will not be centered on the true parameter value.
17 In unreported specifications, we also performed this Monte Carlo exercise for the WT2 estimator. Similar to the first Monte Carlo

exercise, WT2 had worse properties than WT1. Thus, for brevity, we omit the WT2 results from Table 2.
18 In unreported Monte Carlo exercises, we ran the NTD estimator in an attempt to recover the unidentified β parameter. In this uniden-
2
tified case, the optimization routine will randomly select a number from the parameter space. This process has expected value 25. Thus, in
a Monte Carlo exercise where a parameter is unidentified, both bias toward 25 and high RMSE confirm the parameter being unidentified. In
other unreported Monte Carlo exercises, we ran a version of our with-transfers estimators where β0 was restricted to be 1, which facilitated
a direct comparison between the NTD and the with-transfers estimator. These results are available upon request.
19 This is especially true in the low variance case. In the high variance case, the estimator to go awry for several runs of the Monte

Carlo exercise, inflating the bias and RMSE. With skewed outcomes like this, the median bias results are a more reliable estimate of typical
performance.

11
First, transfers data allow for much greater precision in estimating determinants of merger value creation. Second,

the with-transfers estimator can identify parameters that are otherwise unidentified without data on transfers -

namely, target-specific and acquirer-specific determinants of merger value creation.

2 Description of Data

2.1 Merger-Deal Data

We study the matching market for banks using comprehensive bank merger and attribute data from SNL Financial.

The data span all bank mergers in the United States between 1995 and 2005 and provide information about acquirer

and target banks at the merger-deal level. For the date at which the acquisition is announced, the data provide the

asset holdings (Ab and At ) and number of branches (Bb and Bt ) for both acquirer and target bank. We also observe

the market value of the transfer (pbt ) from the acquirer bank to the target bank upon merging.

SNL Financial’s database also provides data on several performance measures of acquirer and target banks.

These performance measures are the efficiency ratio (noninterest expense / (net interest income + other income)),

the loan loss reserve coverage ratio (loan loss reserves / nonperforming loans), and price to book ratio (stock price/

book value) of acquirer.20 As the information on these performance measures is not available for every merger deal

in our sample, we employ these measures in auxiliary specifications that serve to check the robustness of our main

findings, and also to speak directly to managerial motives to merge. In addition, we also construct a measure of

deal value at the merger-deal level to use as the equilibrium transfer pbt in our with-transfers estimator.21 Figure 1

portrays the distribution of deal values in our sample in a density plot of logged deal values. From the figure, the

distribution of logged deal values is well-behaved and symmetric.

2.2 Bank and Branch Attribute Data

The FDIC Summary of Deposits Banking Database gives the deposit holdings as of June 30th of each year and the

location – specifically, Metropolitan Statistical Area (MSA) and state – for each branch of each banking institution

in the United States from 1995 to 2005. Table 3 presents summary evidence on the merger-induced consolidation
20 The data also contain the price to book ratio (stock price/ book value) of target bank at the time of merger as long as the bank is a

publicly traded company. Restricting the sample of mergers to those where the target is publicly traded leaves too few observations to obtain
reliable estimates.
21 We measure deal value as aggregate price paid for the equity of the Entity Sold in the transaction, as of the event in question. Where

available, Deal Value is calculated as the number of fully diluted shares outstanding, less the number of shares excluded from the transaction,
multiplied by the deal value per share, less the number of "in the money" options/warrants/stock appreciation rights times the weighted
average strike price of the options/warrants/stock appreciation rights. Deal Value excludes debt assumed and employee retention pools.

12
in the banking industry. From 1995 to 2005, the number of banking institutions declined from 10,416 to 7,582

while the average number of branches per bank increased from 7.81 to 12.50. The consolidation is not merely

taking place among a few large banks, as is indicated by trimmed mean of branches per bank, which has increased

by nearly 50 percent over this period.

The Summary of Deposits Database also provides information on the regulatory agency responsible for over-

seeing each bank, which depends on the bank’s charter. Banks can adopt either a national charter or a state charter.

If the bank has a national charter, it is regulated federally22 and it must become a member of the Federal Reserve,

which adds an additional layer of audits in exchange for the liquidity provided by being a member of the Federal

Reserve system. Additionally, the FDIC serves as a back-up regulator to all banks with national charters. If the

bank has a state charter, the state regulatory agency is responsible for audits and the FDIC is the primary federal

regulatory.23 A number of mergers in our sample took place between acquirer and target banks with different

charter types. To empirically assess the importance of this regulatory friction, we construct an indicator variable

samecharterbt , which equals one if the acquirer and target have the same type of charter.

At the MSA level, we construct the market share of each banking institution using its fraction of total deposit

holdings in the MSA. Using these market shares, we calculate this MSA-level Herfindahl Hirschman Index (HHI)

before and after each merger, which allows us to assess whether a merger meets the criteria for additional scrutiny

under the U.S. Antitrust Guidelines (HHI > 1800 and ∆HHI > 200).24 Using this information, we construct a

merger-deal level covariate HHIviolatebt , which equals the fraction of target t MSAs for which a merger with

acquirer b would lead to Antitrust scrutiny under the Department of Justice’s Merger Guidelines.

Finally, for acquirer and target branches within MSAs, the FDIC geography identifiers allow us to construct a

merger-deal level covariate overlapbt , which equals the fraction of overlapping MSA markets for the acquirer and

target banks. We construct this variable for each potential merger and estimate its contribution to the match value

function.
22 Depending on the type of institution during our sample time frame, one of two federal regulatory agencies may be responsible for
regulating a bank with a national charter: the Office of Thrift Supervision (OTS), which regulates savings banks and savings and loans
associations; The Office of the Comptroller of the Currency (OCC), which regulates national banks.
23 State-chartered banks can also become members of the Federal Reserve system, but in practice, most state-chartered banks do not. This

suggests that there is a tradeoff between the benefits provided by the Federal Reserve and the auditing requirements.
24 We compute each MSA’s HHI by taking the sum of squared market shares.

13
3 Estimation

3.1 Determinants of Match Value

During our sample period (1995-2005), bank mergers were potentially motivated some combination of efficiencies,

merging to acquire and exploit market power,25 and acquiring better performing branches to improve the bank’s

overall performance.26 Together with our data on institution size and performance (see Section 2.1 for details on

performance measures), we estimate how efficiencies and market power separately affect the bank merger match

value function. A number of these determinants of bank merger value are target- or acquirer-specific. Thus,

the ability of the with-transfers estimator to identify acquirer- and target-specific determinants of merger value is

important.

After the 1994 Riegle-Neal Act, mergers were often motivated by creating national banking networks that are

less sensitive to local economic shocks, and more valuable to consumers. To this end, there are obvious advantages

to banking with a bank with a wider geographic footprint, as Anil Kashyap noted in 1998, “If you are a BofA

customer, you won’t have to pay transaction fees at ATM machines since there’ll be one in every city you go to”

(Marshall, 1998). As an alternative to opening new branches, mergers are an effective way for a bank to achieve

a large, national banking network. We account for this large-banking-network motivation to merge by including

interactions between target and acquirer banking attributes (assets and branches) in our specification of the match

value function.

A merger between two banking institutions will also generate cost efficiencies (or inefficiencies) unrelated to

the size of the network of branches. If economies of scale are easier to capture in banking markets familiar to the

acquiring bank, the match value between an acquirer bank and a target bank will tend to increase with the fraction of

overlapping markets (captured by overlapbt ). On the other hand, Aguirregabiria et al. (2012) document significant

potential to diversify geographic risk post-Riegle-Neal by expanding into new markets. Thus, the effect of overlap

on bank merger value will tend to be negative to the extent geographic diversification of risk is an important motive

for bank mergers.

To address the extent to which the degree of market concentration increases merger match value, we include
25 At the time of our sample, industry experts pointed to efficiencies (or reductions in inefficiencies) from cross-state mergers, and deem-

phasized the role of market power as a motivator for merging (Marshall, 1998). Nevertheless, we consider this hypothesis by including
market power terms in the match value function.
26 In a 1998 newsletter to the Federalist Society (Financial Services & E-Commerce Newsletter - Volume 2, Issue 2, Summer 1998),

James Rockett makes the point that the purported merger mania after the Riegle-Neal Act was - in part - motivated by achieving better stock
market performance and improving balance sheets. To the extent that our measures of financial performance of targets and acquirers, we
can assess whether these were primary motivators.

14
the average Herfindahl-Hischman Index (HHI) of the target bank’s markets as a component of our match value

function. Moreover, to the degree that antitrust regulation tempers this incentive to merge, we also include the

fraction of target markets that would warrant antitrust scrutiny (HHIViolatebt ) in our match value specifications.

In the middle of this merger wave, however, industry experts did not consider market power to be an important

explanation for the large number of mergers during our sample period.27 Nevertheless, including these terms in the

match value function allows us to assess the market concentration hypothesis directly.

3.2 Functional Form for the Match Value Function

To use the maximum-score estimator, we specify a parametric form for the value of a match between target t and

acquirer b.28 For the match-value function, we follow existing empirical work on matching markets (e.g., Fox 2007

and Chen and Song 2013), and evaluate the degree and direction of assortative matching using interactions between

acquirer and target attributes. Exploiting the ability of our estimator to identify non-interacted parameters, we also

extend the specification to include target-specific and acquirer-specific attributes:

F (b,t) = β1WbWt + γ10 Xb + γ20 Xt + γ30 Xbt + εbt (9)

where Wb is an attribute of acquirer b and Wt is the same attribute for target t, Xb and Xt are acquirer-specific and

target-specific covariates, Xbt is a vector of match-specific covariates and εbt is an unobserved match-specific error

term that we assume is independent across matches in our data set. We estimate several variations on this basic

specification, adding to the match function in (9) interaction terms for additional attributes. Using the transfers data

with our with-transfers estimator allows us to identify γ1 and γ2 , which are unidentified in the without-transfers

estimator.

3.3 Subsampling Confidence Intervals

We generate point estimates by running the differential evolution optimization routine from 20 different starting

points and selecting the coefficient vector that yields the highest value for the maximum score objective function.29
27 “Most experts believe a merger between two huge banks operating in different parts of the country – such as NationsBank and BofA –
is unlikely to harm consumers by reducing competition, unlike a consolidation of banks in one local market” (Marshall, 1998).
28 As different specifications for this functional form focus on different features of the matching between acquirer and target, we evaluate

the robustness of our conclusions to several related specifications for the match value function in the maximum-score estimation in Appendix
A.
29 (Fox, 2007) argues that the maximum score estimator is consistent if we randomly sample a sufficiently large number of inequalities to

impose rather than the full number of inequalities (which is often intractably large). Relying on this insight, for each specification we run in

15
For valid inference, we generate the confidence intervals using the subsampling procedure described by Politis and

Romano (1992) and Delgado et al. (2001) to approximate the sampling distribution. For the entire data set, we set

the subsample size to be 500 – approximately 1/3 to 1/4 of the total sample size. Of all samples of size ns = 500

drawn from the original data set (N observations), we select at random 100 of these samples for use in constructing

the confidence bounds.

For each of the S = 100 subsamples, we compute the parameter vector that maximizes the objective function in

(6). Call the estimate from the sth subsample β̂s and the estimate from the original full sample β̂ f ull . The approxi-

1  
mate sampling distribution for our parameter vector can be computed by calculating β̃s = nNs 3 β̂s − β̂ f ull + β̂ f ull
√
for each subsample. This procedure accounts for the 3 N convergence of the maximum score estimator (Politis and

Romano, 1992; Delgado et al., 2001). We take the 2.5th percentile and the 97.5th percentile of this empirical

sampling distribution to compute 95 percent confidence intervals for all of our estimates.

4 Main Findings

4.1 Evidence on the Determinants of Merger Value Creation

This section presents a number of alternative specifications of the match value function in order to better understand

the determinants of value creation in the merger market. The most robust determinants of merger value creation

are lower regulatory frictions, cost efficiencies from overlapping markets, and network effects exemplified in the

assortative matching between acquirers and targets.

4.1.1 Bank Size, Market Concentration, and Overlap of Markets

Table 4 presents results from estimating the revealed preference model with merger value function given by equa-

tion (9). In every specification in Table 4, the coefficient estimates on the interactions between acquirer and target

assets (branches) are positive and statistically significant.30 This finding suggests that large acquirer banks tend

to match with larger target banks, and that this pattern of matching is revealed to be valuable by the pattern of

potential mergers that did not occur. For example, the estimate on the interactive term in column (2) implies that

a 10 percent increase in the number of acquirer branches is associated with a $408,000 increase in the effect of

an additional target branch on merger match value. This interactive effect remains significant whether or not the
 
40
this paper, we sample 40 acquirer-target pairs from each year and form the inequalities implied by their matching.
2
30 We take statistical significance to mean that the 95 percent confidence interval from subsampling does not contain zero.

16
match value function includes target assets and the interactive term between acquirer and target assets. Although

the magnitudes vary across specifications, the interpretation in the context of the observed match is that the match-

ing equilibrium exhibits a strong positive assortative match on both branches and assets, a finding that is consistent

with the conventional understanding that mergers during this time period (1995 to 2005) were motivated by taking

advantage of large national networks.

Across specifications in Table 4, the estimates for the own effect of target assets and branches is negative

across specifications, and these own effects tend to be statistically significant. This finding together with the

consistently significant interactive effects suggests that a larger number of assets and branches in the target bank

contributes positively to the match value, but not independently of the size of the acquirer bank. Taken together,

one interpretation of these estimates is that a network of branches and customers is more valuable on average

as the size of the network grows, suggesting that an acquirer with many branches and customers would derive

disproportionately more value from a large target, ceteris paribus. On the other hand, there is a cost to managing

more assets and branches. This cost shows up in the coefficient estimates on target attributes, which are consistently

negative and statistically significant.

In the final two columns of Table 4, the positive and significant estimates for overlapbt suggest that banks

derive significantly more match value if the acquirer and target have more overlapping markets. Relative to having

no overlap in MSA markets, the estimate in column (4) implies that an acquirer and target with complete overlap

in MSA markets will realize a nearly $1 million ($967,440) increase in the merger match value. This finding

suggests that the merging banks can realize operating efficiencies better when the target and acquirer banks have

branches in the same MSA. The magnitude of this estimate is sensible given previous estimates to operate a bank

branch. In a different context, Radecki et al. (1996) estimate that the total costs of operating a branch are around

$1.4 million annually with indirect costs (e.g., advertising, and computing systems) amounting to half of that.

Given this estimate holds constant the number of branches as another predictor in the match value function, these

efficiencies more likely represent cost savings on indirect costs like advertising that can be spread across multiple

branches than cost savings from branch closures.

To the role of market concentration, the positive estimate on target bank’s average HHI suggests that greater

market concentration increases the match value, consistent with greater market concentration allowing the com-

bined bank to extract additional profit. On the other hand, having a higher fraction of MSA-level markets that

would justify antitrust scrutiny (i.e., greater HHI Violation Fraction) does not seem to either detract from the match

value nor add to it. As column (5) demonstrates, this finding on insensitivity of the match value function to the

17
HHI violation fraction is robust to controlling for the target bank’s average HHI. Taken together with the results on

assortative match and overlapping markets, the results from these specifications indicate that both efficiency and

market power rationales to merge create value for the merger.

4.1.2 The Role of Pre-Merger Bank Performance and Acquirer Valuation

We also allow the match value function to depend on performance measures of acquirers and targets: the efficiency

ratio (noninterest expense/ income) for both acquirer and target, the loan loss reserve coverage ratio (loan loss

reserves/ nonperforming loans) for both acquirer and target, and the price to book ratio for the acquirer.31 We

include these performance measures to assess the importance of efficiency, distress, and acquirer valuation in

merger value creation.

Given existing work on agency and merger activity, this is a natural line of inquiry. Although merger value could

depend on operational performance for efficiency reasons (e.g., see Maksimovic and Phillips (2001)), acquirer

performance characteristics may also proxy for agency frictions, and thus be related to merger value creation

through that channel. In addition, motivated by work on agency and value-destroying mergers (e.g., Harford et al.

2012), another natural prediction is that acquirer banks with a greater price to book ratio will be more likely to

engage in value-destroying mergers. A conclusion of this sort is obtained by Bayazitova et al. (2012), but the role

of overvalued equity in leading to value-destroying activities is familiar in the broader literature as well (e.g., see

Jensen 2004).

In Table 5, we report specifications for merger value that include these measures of performance, and across

specifications, there does not seem to be much of a relationship between merger value and either target performance

or acquirer performance. Nonetheless, the qualitative findings of Section 4.1.1 remain true. In particular, there

appears to be an assortative match, and the overlap between acquirer and target markets is an important indicator of

merger value creation. The fact that these matching and branching efficiency motives to merge appear to be robust,

while performance measures do not appear to systematically affect merger value.

We rationalize this null finding by observing that our measure of merger value creation is unaffected by investor

motives, while previous work on this question has used merger announcement returns. Using merger announcement

returns can be especially problematic in evaluating the role of acquirer overvaluation in merger value creation be-

cause any revaluation by investors of an overvalued acquirer will tend to lead the acquirer’s stock price to decline,
31 These measures are available from SNL Financial, but not for the same set of banks. As such, including all measures at once reduces

the number of observations in the specification to the point where identification is questionable. Thus, we evaluate the contribution of each
of these categories in isolation of the other.

18
and thus, be taken as an indication of merger value destruction. Because our measure is not affected by over-

valuation of the acquirer except through fundamental value creation, we view our approach as being particularly

advantageous in evaluating this effect. Thus, we conclude that the consolidation of banking institutions strongly

reflects the relaxation of regulation and efficiency motives.

4.1.3 The Role of Bank Regulation

We now use our model to quantify the implicit costs of bank chartering through frictions in the bank merger market.

To evaluate these implicit costs, we allow the merger value function to depend on a dummy variable samecharterbt

that equals one if the acquirer and target have the same type of charter, and thus, are regulated by the same regulator.

We also include an interaction between samecharterbt and overlapbt . The interactive effect is reasonable if having

matching charters complicates dealings multiple types of regulators, especially if the regulation impacts the cost

efficiencies realized in overlapping markets. Agarwal et al. (2012) study a similar regulatory friction in the context

of small state chartered banks that are audited on a rotational basis, finding there are costs to adjusting to different

types of regulators. Agarwal et al. (2012) document costs of inconsistent regulators in the context of rotational

regulation, suggesting in that context that window dressing for the regulator can be costly because it leads to

artificial variability in operations. In the merger context, we evaluate whether there are implicit costs of having to

adapt to a new regulatory regime that are reflected by the choices of the merging banks.

Table 6 presents evidence on the role of bank charter type in determining merger value creation. When we

include the samecharterbt dummy variable, the coefficient estimate is large and positive, but not statistically sig-

nificant. The estimate implies an increase in merger match value of $158,450 on average if the target and acquirer

banks have the same charter. When we include the interaction of this dummy variable with the percentage of over-

lapping markets, the coefficient is large and statistically significant. This finding suggests that the match between

banking charters is more important for geographically overlapping banks. More concretely, for a target and ac-

quirer whose MSA markets completely overlap, having the same charter increases match value by $743,000, and

this increase is statistically significant. More generally, this finding suggests that a match between bank charters

can contribute to the value of the merger by avoiding these regulatory frictions, especially as a bank has branches

in more markets, and thus, greater overlap with potential targets.

19
4.1.4 Year-by-Year Results

Although the revealed preference method makes relatively few assumptions, we make a notable simplifying as-

sumption to adapt the estimator to the bank mergers setting; we assume the bank merger market becomes national

immediately following the Riegle-Neal Act. In reality, the act was implemented on a staggered basis at the state

level after the immediate passage of the act, and thus, the bank merger market was not completely national until

around 2000 (Johnson and Rice, 2008). The scope of the merger market is important for the revealed preference

estimator because it defines which mergers comprise the set of outside options to the realized set of mergers. If

some of these were not feasible because of delayed adoption of the law, it could affect the estimates.

To evaluate this concern, we estimate the merger value function separately for each year in our sample, and

examine the time series of the effects we estimate. For this exercise, we estimate two specifications for the merger

value function: (1) the specification in Table 4 with overlap and market concentration regulation variables, and (2)

the specification in Table 6 with chartering information included. For both specifications, we present in Figure 2 the

time series plots of the estimated coefficients for log (Assetsb ) × Assetst , overlapbt , and samecharterbt × overlapbt .

Although there is time series variation in these estimates, the effects we estimate are remarkably consistent in sign

and estimated magnitude.

We summarize the year-by-year estimates’ persistence and sign in Table 7, which computes the time-series

mean for each coefficient estimate, as well as the standard error of the time series mean.32 The estimates are of

similar magnitude and signficance as the main specifications. As in earlier specifications, Table 7 highlights three

robust features of our setting: (i) a positive assortative match on bank size as measured by assets, (ii) a significant

positive effect of having overlapping markets on merger value creation, and (iii) an important role of regulation,

especially in taking advantage of the value of having overlapping markets.

4.2 Evidence on Merger Value Creation

The fitted values from our merger value function provide merger-specific estimates for merger value creation from

the perspective of the merging banks. As we demonstrated in Section 4.1.2, the estimated merger value function

is not sensitive to measures of pre-merger performance or acquirer valuation, factors that should reflect manager-

specific preferences to merge (Jensen, 2004). Thus, we take our estimated merger value function to reflect under-

lying shareholder value.

32 Although our annual regressions are not OLS, this is an approach very similar to Fama and MacBeth (1973), which is an approach that

assumes that the sampling error in the coefficient estimates is independently distributed across years.

20
 From the standpoint of our estimated merger value function, we can use the fitted values from the specification

in column (5) of Table 4 to quantify the degree to which unmeasured agency frictions can destroy shareholder

value. Table 8 presents summary statistics on the fraction of mergers that we compute to have negative merger

value. As this table indicates, the scope for value-destroying mergers is quite small. On average, only 6.02 percent

of mergers in a given year yield negative match value, and in every year of the sample, the lost value from these

mergers is less than one percent of overall merger value creation.

These estimates quantify the scope for value-reducing agency problems in the merger market. For example,

if we observe a merger that appears to reduce value according to cost efficiencies, market power, or network-

enhancing benefits, it would be straightforward to conclude that the merger reduces shareholder value, which

may indicate a manager-shareholder agency problem (e.g., see Harford et al. (2012)). On the other hand, our

specification for merger value creation may not capture some types of merger-specific synergies. To the extent these

synergies are unmeasured and enhance the profitability of mergers that look unprofitable according to our measures,

our revealed preference method will classify some of these mergers as negative value when they create value for

unmeasured reasons. Because the set of mergers that appear to reduce value according to our specifications could

be of either of these types, we hold that our estimate of the extent of value-destroying mergers is conservatively

high.

Our matching model allows us to decompose value destroying mergers into two types: (a) mergers that destroy

value when an acquirer had a positive value target available, and (b) mergers by acquirers that would destroy

value regardless of the target. To conduct this decomposition, we estimate the match value function using (9),

and compute the structural match value for each acquirer-target pair, both for actual matches and for acquirer-

target pairs that did not merge with one another, but with another bank in the same year. Using these structural

merger values, we solve the linear programming problem in equation (8) for the equilibrium one-to-one match, the

equilibrium transfer amounts, and the match value produced in equilibrium. If an acquirer goes unmatched in the

solution to the linear programming problem, none of the remaining feasible targets would generate positive match

value, and thus, the acquirer would partake in a value-destroying merger regardless of the target.

As is indicated in Table 8, this fraction of value destroying acquirers ranges from 1.81 percent (1998) to 4.17

percent (1995), with a cross-year average of 2.94 percent. This estimate indicates a small scope for value-destroying

acquirers, on an order of magnitude that is consistent with recent findings by Bayazitova et al. (2012). We now turn

to developing a number of in-sample and out-of-sample assessments of the performance of our estimates.

21
5 Robustness and Extensions

5.1 In-Sample Performance of Merger Value Function

Our framework allows us to compute a number of measures that allow us to evaluate the in-sample performance

of the revealed preference method. To evaluate our revealed preference model, we benchmark against the optimal

computed match as we did in evaluating the extent of merger value creation in the bank merger sample. We compute

five measures of fit for our merger value function: (i) the fraction of mergers for which the realized match has the

highest computed match value (Highest Value), (ii) the fraction of mergers for which the realized match is the same

as the optimal pattern of mergers (Same Match), (iii) the average percentile rank of the observed matched target in

the rank-order list of acquirers (Avg. Rank), (iv) the correlation coefficient between the actual deal values and the

equilibrium transfers computed from the linear programming problem in (8) (Price ρ), (v) the fraction of realized

merger value relative to the merger value created in the solution to the linear programming problem in (8) (% of

Optimal Value). Greater values for each of these measures implies better performance of the estimated merger

value function in sample.

For each year in our sample, Table 9 summarizes these measures of performance. Same Match ranges from

0.118 to 0.355, but it is relatively stable across years with an average of 0.261. Contrast Same Match with the

Highest Value (a naive measure of fit), which ranges from 0.03 to 0.27 during our sample time frame, and averages

0.13. The Highest Value fraction is lower for in-sample predictions because some targets would generate the highest

value for multiple acquirers, but this is not possible in equilibrium. Our equilibrium measure of fit (Same Match)

accounts for this, and as a result, the model correctly predicts observed matches where the acquirer-target match

does not generate the highest value for the acquirer (but where that acquirer’s highest value target is assigned to

another acquirer who values the target more highly), as is indicated by the greater success rate of Same Match.

Using average rank in the acquirer’s rank order list, we observe a measured Avg. Rank ranging from 0.70 to

0.84 across years, with an average of 0.79 . Thus, when the estimated match value is not precisely at the top for the

observed match, it is very often near the top of match values. By this measure, the fit of the model appears to be

quite good. The advantage of an out-of-equilibrium measure of fit like Avg. Rank is that it is easy to compute, but

their disadvantage is that it does not account for the effect of small perturbations in value on the matching market

equilibrium.

Given the closer link to the underlying equilibrium of Same Match, one way to evaluate the relative validity

of these out-of-equilibrium measures of fit is to compute their correlation across years with Same Match. The

22
correlation between the Highest Value and Same Match is only 0.209 while the correlation between Avg. Rank and

Same Match is greater at 0.396 . On this basis, we may prefer Avg. Rank to Highest Value for in-sample measures

of it.

In our fourth assessment of the performance of the estimates from the revealed preference model, we compute

the correlation between the actual transfer amounts to the equilibrium transfer prices from the dual of the linear

programming problem. Regardless of the year considered, the high correlation between actual transfer amounts and

the transfers from the linear programming problem, ranging from 0.715 to 0.996 indicates that our model replicate

the transfer amounts quite well.

Finally, we contrast the observed set of mergers with this computed optimal pattern of mergers by computing

the total match value under the observed equilibrium and compare it to the total match value in the solution to the

linear programming problem. The implied value of mergers for the observed matching is meaningful, ranging from

$93 million in 2002 to $1.96 billion in 2004. By this metric, the actual mergers produce 72.1 to 97.1 percent of the

optimum of the linear programming problem with an average of 85.0 percent. This small scope (15 percent) for the

amount of value destroyed is a conservative estimate of the amount of value left on the table from agency issues

and optimization error because the optimal solution to the linear program may overfit the particular characteristics

of the sample while the realized mergers may account for merger-specific synergies that, in reality, create value.

From this standpoint, the merger value function we estimate fits quite well.

5.2 Comparison to Binary Logit Regression

Another way to assess our revealed preference method is to compare its predictive accuracy to the performance of

a binary logit regression that uses the same set of regressors. To implement the binary logit regression, we need

to construct a data set of counterfactual and observed mergers with all of the information we used in our revealed

preference model. On this data set, we use binary logistic regression to predict whether an acquirer-target pair

was an observed merger using the features of our match value specification as the right hand side of the logistic

regression.

We use the fitted values from the logistic regression to predict which target the acquirer will acquire. For each

acquirer, the target with the largest fitted value is predicted to merge with the acquirer. Using this rule, we find that

logistic regression performs dramatically worse than our revealed preference method. As the fraction of successful

predictions in Table 10 indicate, binary logistic regression successfully predicts slightly greater than one percent

of observed mergers, as compared to a yearly average of 26 percent using our reduced form method (see Table 9).

23
We attribute the significantly-better performance of our method to the fact that we explicitly take into account the

nature of equilibrium in the bank merger market. Not only does this provide our method with an improved ability

to relate our estimates to economic theory, the comparison to predictive logistic regression suggests that we achieve

significant gains in predictive accuracy.

5.3 Out-of-Sample Fit and Predicting Mergers

A notable extension of our framework is to estimate a merger value function and use it predict mergers that will

subsequently take place. The year-by-year estimates suggest that we could estimate the merger value function using

observed and counterfactual mergers from year T − 1, then roll forward our estimated merger value function to date

T to predict the mergers that are most likely to take place.

With an estimated match value function, we can evaluate the match value for realized mergers as well as for

counterfactual mergers (a hypothetical merger between the acquirer and another target). To evaluate the ability of

the model to predict mergers, we estimate the match value using the estimates from the previous year, and then

assess the model fit using the measures of fit we discussed in the previous section.

Table 11 summarizes our ability to predict mergers out of sample. As expected, the Same Match column

indicates that our ability to predict mergers out of sample is worse than the in-sample fit. Specifically, the average

fraction of correct predictions across years is 0.032. This fraction of correct predictions as well as the drop off in

out-of-sample predictability is comparable33 with other recent work on the ability to predict mergers in and out of

sample (Cremers et al., 2009). In addition, the correlation of the prices from the dual of the linear programming

problem with actual prices remains high (ranging from 0.625 to 0.997). That is, the model appears to predict the

pattern of transfers better than the identity of the participants.

Table 11 also illustrates why it is unwise to use non-equilibrium measures of fit (Highest Value and Avg. Rank)

in the two-sided matching setting. Using the Highest Value fraction and Avg. Rank as our measures of fit, the

out-of-sample fit appears to be on par with the in-sample fit. Nevertheless, these measures do not account for the

fact that small perturbations in the payoffs can lead to large changes in the observed match. Even if the differences

in match value do not reorder the preference ordering for each particular acquirer, they can change the intensity of

preference, and this can change the allocation. Our equilibrium measure of fit accounts for this kind of reordering,

and hence, it is more realistic about the out-of-sample validity of the model.
33 For example, Cremers et al. (2009) construct a takeover factor, which together with the market factor, exhibits a cross-sectional R2 of

0.1339. When the authors consider out-of-sample predictions similar to what we do in this section, their R2 drops to 0.0403.

24
5.4 Counterfactual Evidence

As we saw in our bank charter specifications, an important aspect of the bank merger market is the match between

type of banking regulation that applies to target and acquirer banks. Our specifications in Table 6 implied that

acquirer and target banks with the same type of charter experience a premium in their match value. This premium

reflects a cost of multiple types of bank charters. In this section, we report the findings from a counterfactual

simulation where we impose that all banks have the same charter. Our findings suggest a sizable cost of the dual

chartering system, which manifests itself in fewer mergers between banks of different chartering types.

Table 12 reports the results from our counterfactual simulation. Relative to the baseline where banks may have

different charters (and hence different regulatory agencies), the number of acquirer-target pairs that go unmatched

declines slightly, and the total match value is significantly larger when there is no distinction between the charter

types, typically a 20 to 50 percent increase in the total estimated match value of bank mergers for any given year.

Despite its large magnitude relative to banks that merge in a particular year, our estimated magnitude of 20 to

50 percent of the match value reflects a much smaller fraction of the banking industry as a whole. We observed

approximately 200 mergers per year relative to a total number of banks from 7,000-10,000.34 Rescaling our esti-

mate by the fraction of banks that merge in a typical year in our sample, our counterfactual-estimated cost of bank

chartering regulation equals 1 to 2.5 percent of the value of the entire banking industry. To put this estimate in

context, 1 to 2.5 percent is slightly larger, but on the same order as the annual supervisory fee paid by national

banks. For example, see calculations in Whalen (2010), Table 1, which report that supervisory fees for national

banks average $21,000 for a bank with $25 million in assets, and $48,000 for a bank with $100 million in assets.

In percentage terms, this amounts to approximately 0.5 percent to nearly 1 percent.

The implied effect reflects direct costs of additional regulation and the costs imposed by compliance with

diverse chartering rules, as well as foregone opportunities when these costs stand in the way of a merger between

a state bank and a national bank. Consider the example of a state acquirer bank and a national target bank with

branches in multiple states. The potential merger may be advantageous due to an otherwise large overlap of markets

and similarity of assets and branches, but the national bank has branches in another state. In this case, the state

bank must decide whether it will learn and comply with federal charter regulations (either for the acquired branches

or for the bank as a whole), or if upon acquisition of the national bank, it will divest of holdings in other states in

order to bring the entire bank under the original state charter. In either case, this is a significant friction in the bank
34 For this calculation, take 400 merging banks from 200 mergers, and use 8000 banks as the size of the overall industry.

25
merger market.

6 Conclusion

In the context of bank mergers, this paper develops a novel technique that exploits the features of a matching mar-

ket equilibrium to estimate merger value creation without relying on stock market information. The fact that our

approach does not rely on stock market information to recover estimates of value creation is particularly advanta-

geous, given recent work that has argued that investor re-evaluation complicates the interpretation of merger value

creation estimates from announcement returns (Bhagat et al., 2005; Bayazitova et al., 2012). In our application, we

estimate that 6.02 percent of mergers in our sample were value-destroying mergers, a finding that matches closely

with recent work (Bayazitova et al., 2012). When we evaluate the determinants of merger value creation, the merg-

ers we study appear to be motivated by branching efficiency and competitive concerns, rather than highlighting

managerial agency issues or performance-motivated mergers (Jensen, 2004; Harford et al., 2012).

Despite its simplicity, our method yields useful insight into what motivates mergers. We obtain a structural

estimate of the match value function that allows us to forecast the value of potential bank mergers based on char-

acteristics of the target and acquirer bank. In our analysis, we show how this method can be applied to determine

if a proposed merger is value creating or value destroying, which makes it potentially valuable for the banks them-

selves, or for investors in publicly-traded banks involved in a merger or acquisition. A reliable estimate of the

structural match value function also allows us to forecast which mergers will occur. In the context of our sample of

bank mergers, we find that our method outperforms relevant alternatives.

Consistent with recent work by Agarwal et al. (2012), our specifications suggest that significant implicit costs

are imposed on banks through regulation. The fact that banks with national charters are subject to different regu-

latory procedures than banks with state charters increases the cost of mergers between banks of different charter

types. From our counterfactual exercise, we estimate that the cost of bank chartering regulation amounts to 20 to

50 percent of the value created by bank mergers in a typical year. Rescaled by the number of banks that merge in a

given year, this amounts to a cost of chartering regulation of 1 to 2.5 percent of the value of the banking industry.

This paper is part of an emerging literature that uses the structure of matching markets and networks in research

on financial markets (Sorensen, 2007; Akkus et al., 2013; Chen and Song, 2013; Ahern and Harford, 2014). As

matching processes are ubiquitous in financial markets and endogeneity frequently confounds finance research

(Roberts and Whited, 2012), we expect techniques that leverage the structure of matching in financial markets will

26
play an increasingly important role in finance reasearch going forward.

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Tables and Figures

Table 1: Monte Carlo Results, maximum score estimation of β1 (100 replications)

without-transfers (NTD) with-transfers (WT1) with-transfers (WT2)

σ Bias RMSE σ Bias RMSE σ Bias RMSE
1 0.032 0.485 1 0.007 0.018 1 0.001 0.023
5 0.503 1.541 5 0.011 0.046 5 0.014 0.046
20 6.399 14.349 20 0.127 0.200 20 0.618 4.778
Note: The estimates in this table were produced by maximizing the objective function (5) for NTD, (6) for with-transfers (WT1) and (7)
for with-transfers (WT2) using R’s differential evolution routine (package: DEoptim by Mullen et al., 2011). In the differential evolution
method, we set the number of population members to be 50, the scaling factor to be 0.5, the optimization window for the parameter space
[0, 50] and used the classical DE strategy (strategy = 1). The true standard deviation of the observable portion of the match value function
Ab At + 1.5Bb Bt is 28.15.

Table 2: Monte Carlo Results, maximum score estimation of interaction term β1 and non-interaction term β2 (100
replications)

(a) Without-Transfers Estimator (NTD)

σ Bias β0 RMSE β0 Bias β1 RMSE β1 Bias β2 RMSE β2
5 (n) (n) 0.434 1.389 (ni) (ni)
20 (n) (n) 4.012 11.256 (ni) (ni)

(b) With-Transfers Estimator (WT1)

σ Bias β0 RMSE β0 Bias β1 RMSE β1 Bias β2 RMSE β2
5 0.043 0.210 0.045 0.264 1.152 5.342
20 1.500 5.539 1.782 6.304 5.978 12.475

(c) With-Transfers Median Bias Results

σ Median Bias β0 Median Bias β1 Median Bias β2
5 0.013 0.009 0.024
20 0.186 0.165 1.713

Note: In the without-transfers panel, (n) indicates that the coefficient was normalized for identification purposes, while (ni) indicates that
the coefficient is not theoretically identified. The estimates in this table were produced by maximizing the objective function (5) for NTD, for
with-transfers (WT1) using R’s differential evolution routine (Mullen et al., 2011). In the differential evolution method, we set the number
of population members to be 50, the scaling factor to be 0.5, the optimization window for the parameter space [0, 50] × [0, 50] and used the
classical DE strategy (strategy = 1). The true standard deviation of the observed portion of the match value function is 28.59.

31
 Figure 1: Distribution of Deal Values in the Bank Merger Sample

Note: This plot portrays the distribution of logged deal values in the sample of observed mergers. Deal value is defined as aggregate price
paid for the equity of the Entity Sold in the transaction, as of the event in question. Where available, Deal Value is calculated as the number
of fully diluted shares outstanding, less the number of shares excluded from the transaction, multiplied by the deal value per share, less the
number of "in the money" options/warrants/stock appreciation rights times the weighted average strike price of the options/warrants/stock
appreciation rights. Deal Value excludes debt assumed and employee retention pools.

Table 3: Consolidation in the U.S. Banking Industry (1994 to 2006)

Year Num. Banks Avg. Branches Tr. Avg. Branches max

1994 10416 7.81 2.71 2024
1995 9825 8.24 2.81 2028
1996 9422 8.64 2.91 2052
1997 9110 9.01 3.03 2643
1998 8744 9.53 3.14 3132
1999 8449 9.98 3.24 4579
2000 8324 10.27 3.33 4510
2001 8175 10.53 3.43 4329
2002 8031 10.78 3.54 4334
2003 7877 11.15 3.66 4296
2004 7756 11.58 3.74 5835
2005 7644 12.04 3.83 5914
2006 7582 12.50 3.94 5789

Source: FDIC Summary of Deposits Database. Trimmed averages are computed by dropping the top and bottom deciles and computing the
mean.

32
 Table 4: Maximum Score Estimates of Match Value Function

(1) (2) (3) (4) (5)

Assetst −360.36∗∗ −211.02∗∗ −2.33∗∗ −392.33∗∗
(-443.09, -225.19) (-395.02, -126.96) (-82.92, -0.92) (-725.27, -99.00)
log(Assetsb ) × Assetst 47.88∗∗ 24.84∗∗ 0.30∗∗ 151.12∗∗
(29.32, 59.88) (15.02, 48.69) (0.13, 9.98) (91.28, 375.88)
Branchest −32.71∗∗ −151.29∗∗ -7.94 -7.11
(-44.27, -25.21) (-389.08, -111.15 ) (-121.00, 33.37) (-83.60, 3.55)
log(Branchesb ) × Branchest 40.80∗∗ 644.79∗∗ 13.86∗∗ 10.04∗∗
(28.45, 44.60) (372.68, 811.83) (5.53, 137.94) (5.56, 67.57)
MSA Overlap 967.44∗∗ 1210.45∗∗
(729.42, 984.44) (1098.15, 1397.11)
HHI Violation Fraction 366.91 463.97
(-200.73, 761.48) (-440.10, 1146.41)
Target HHI 0.15∗∗
(0.05, 0.42)
Number of Observations 1484 1484 1484 1484 1484
Percent of Ineq. 0.43 0.37 0.44 0.78 0.79

Note: ∗∗ indicates significance at the five percent level, i.e., 95 percent confidence interval does not contain 0. This table presents estimates of the match
value function F(b,t) = β 0 Xbt + εbt using maximum score estimation. Subsampling-based 95 percent confidence intervals in parentheses. Point estimates
are generated by running the differential evolution optimization routine using R’s DEoptim package (Mullen et al. 2011) For differential evolution, we use
100 population members, scaling parameter 0.5 and we employ the classical differential evolution strategy (strategy =1). For point estimates, we run the
optimization routine for 20 different starting points (seeds) and select the run that achieves the largest value of the objective function. For confidence intervals,
we use the subsampling procedure described in Politis and Romano (1992). We set the subsample size to be 500 (approximately 1/3 to 1/4 the total sample
size) and randomly generate 100 replications of the routine to obtain confidence bounds.

33
 Table 5: Maximum Score Estimates of Match Value Function with Performance Measures

(1) (2) (3) (4) (5)

Assetst −318.25∗∗ −2.07∗∗ -371.12 −1.43∗∗ −455.64∗∗
(-441.91, -203.95) (-312.79, -0.67) (-456.99, 231.99) (-241.62, -0.16) (-470.90, -190.65)
log(Assetsb ) × Assetst 41.97∗∗ 0.28∗∗ 48.20∗∗ 0.17∗∗ 55.84∗∗
(26.98, 59.82) (0.09, 41.17) (29.99, 58.91) (0.03, 29.61) (23.44, 58.51)
Branchest -312.00 -1.79 -265.30 2.76 -276.99
(-442.11, 377.21) (-241.74, 500.10) (-415.28, 521.83) (-166.48, 411.50) (-406.70, 374.24)
log(Branchesb ) × Branchest 73.23 0.75 58.97 0.02 76.93
(-97.77, 134.66) (-159.91, 140.23) (-134.86, 286.71) (-70.79, 59.97) (-80.68, 111.20)
Efficiency Ratio Target -5.80 4.26
(-62.07, 10.20) (-46.86, 22.21)
Efficiency Ratio Acquirer -304.72 112.57
(-414.09, 563.07) (-279.81, 746.25)
LLR Ratio Target 1.72 -0.03
(-2.45, 6.00) (-1.58, 1.04)
LLR Ratio Acquirer 314.32 -112.64
(-204.21, 737.10) (-337.23, 579.96)
Price-to-Book Ratio Acquirer -233.21
(-366.28, 471.89)
MSA Overlap 757.89∗∗ 886.86∗∗
(335.91, 933.89) (655.64, 958.27)
HHI Violation Fraction 933.42 411.92
(-42.09, 943.88) (-169.98, 757.19)
Number of Observations 1269 1269 765 765 1158
Percent of Ineq. 0.39 0.78 0.38 0.81 0.41

Note: ∗∗ indicates significance at the five percent level, i.e., 95 percent confidence interval does not contain 0. This table presents estimates of the match
value function F(b,t) = β 0 Xbt + εbt using maximum score estimation. Subsampling-based 95 percent confidence intervals in parentheses. Point estimates
are generated by running the differential evolution optimization routine using R’s DEoptim package (Mullen et al. 2011) For differential evolution, we use
100 population members, scaling parameter 0.5 and we employ the classical differential evolution strategy (strategy =1). For point estimates, we run the
optimization routine for 20 different starting points (seeds) and select the run that achieves the largest value of the objective function. For confidence intervals,
we use the subsampling procedure described in Politis and Romano (1992). We set the subsample size to be 500 (approximately 1/3 to 1/4 the total sample
size) and randomly generate 100 replications of the routine to obtain confidence bounds.

34
 Table 6: Estimates of the Match Value Function using Bank Chartering Information

(1) (2)
MSA Overlap 934.98∗∗ 878.21∗∗
(700.21, 976.72) (661.52, 957.71)
Same Charter 158.45 37.60
(-85.41, 331.96) (-211.71, 306.30)
(Same Charter)×(MSA Overlap) 743.28∗∗
(117.42, 901.26)
Number of Observations 1484 1484
Pct. of Inqualities 0.75 0.75

Note: ∗∗ indicates significance at the five percent level, i.e., 95 percent confidence interval does not contain 0. This table presents estimates
of the match value function F(b,t) = β 0 Xbt + εbt using maximum score estimation. Subsampling-based 95 percent confidence intervals in
parentheses. As in Table 5, the specifications in this table include (but do not report for the sake of brevity) own-effects and interactions
for assets and branches as well as HHI Violation Fraction. Point estimates are generated by running the differential evolution optimization
routine using R’s DEoptim package (Mullen et al. 2011) For differential evolution, we use 100 population members, scaling parameter
0.5 and we employ the classical differential evolution strategy (strategy =1). For point estimates, we run the optimization routine for 20
different starting points (seeds) and select the run that achieves the largest value of the objective function. For confidence intervals, we use
the subsampling procedure described in Politis and Romano (1992). We set the subsample size to be 500 (approximately 1/3 to 1/4 the total
sample size) and randomly generate 100 replications of the routine to obtain confidence bounds.

Figure 2: Time Series of Year-by-Year Estimated Effects on Match Value for Selected Variables

Note: Each panel plots a time series of coefficient estimates from estimating of the match value function for each year in the sample. Panels
labeled (1) correspond to a specification for the mergervalue function that does not include bank chartering information, while Panels labeled
(2) include an indicator for whether the acquirer and target have the same type of chater, as well as an interaction of this indicator with the
degree of overlap of the acquirer and target markets.

35
 Table 7: Time Series Average of Yearly Estimates of the Match Value Function

(1) (2)
Assetst −26.61∗∗∗ −32.36∗∗
(8.13) (13.70)
log(Assetsb ) × Assetst 3.49∗∗∗ 3.94∗∗
(1.02) (1.68)
Branchest −31.68 −151.24
(44.10) (115.86)
log(Branchesb ) × Branchest 2.19 40.54
(12.86) (29.23)
MSA Overlap 854.44∗∗∗ 818.78∗∗∗
(40.85) (37.10)
HHI Violation −131.44 -57.45
(114.65) (177.39)
Same Charter -189.76
(129.68)
(Same Charter)×(MSA Overlap) 660.93∗∗∗
(81.52)
Average # of Mergers 134.91 134.91
Number of Years 11 11
Average Percent of Ineq. 0.7282 0.7482

Note: ∗∗∗ , ∗∗ , and ∗ indicate significance at the one, five, and ten percent level. Each estimate in this table is a time series mean of yearly
estimates of the match value function F(b,t) = β 0 Xbt + εbt , which were produced using maximum score estimation. The standard error of
the time series mean is reported in parentheses.

Table 8: Evaluating the Extent and Impact of Value Destroying Mergers

Year # Mergers % Value Destroying % Unmatched in Optimum Match Value % of Value Lost
1995 168 5.95% 4.17% 190.445 0.27%
1996 146 4.79% 3.42% 356.079 0.30%
1997 152 4.61% 3.29% 189.349 0.38%
1998 221 5.88% 1.81% 549.745 0.21%
1999 158 6.96% 1.90% 264.840 0.21%
2000 109 2.75% 1.83% 210.457 0.13%
2001 121 8.26% 4.13% 326.746 0.43%
2002 93 5.38% 3.23% 93.517 0.24%
2003 95 6.32% 2.11% 122.004 0.27%
2004 120 8.33% 2.50% 1957.699 0.07%
2005 101 6.93% 3.96% 114.253 0.98%

Note: Match value measured in millions of dollars is the sum across mergers in that year of the estimated match value for merged acquirer-
target pairs. % Value Destroying is the fraction of mergers with negative merger value creation. % of Value Lost is the total (negative)
merger value of these value destroying mergers divided by the overall match value. Unmatched acquirers and targets occur in the solution to
the linear programming problem if mergers involving these acquirers and targets would be value destroying under the re-computed optimal
configuration of mergers.

36
 Table 9: Year-by-Year Measures of Fit

Year # Mergers Same Match Highest Value Avg Rank Price ρ % of Optimal Value
1995 168 0.274 0.15 0.81 0.947 84.4
1996 146 0.171 0.03 0.74 0.996 88.4
1997 152 0.237 0.12 0.72 0.945 83.2
1998 221 0.118 0.10 0.73 0.994 86.5
1999 158 0.241 0.18 0.81 0.994 72.1
2000 109 0.303 0.06 0.70 0.941 85.0
2001 121 0.331 0.12 0.78 0.981 84.0
2002 93 0.355 0.19 0.82 0.792 83.3
2003 95 0.253 0.27 0.84 0.984 85.8
2004 120 0.283 0.17 0.79 0.988 97.1
2005 101 0.307 0.04 0.79 0.715 85.4

Note: "Same Match" is the fraction of acquirers that are matched to the same target in the optimal pattern of mergers, "Highest Value" is
the fraction of acquirers whose realized target produces the highest match value of any possible target, "Price ρ" is the correlation between
the equilibrium transfers and the transfers implied by the equilibrium solution. "Highest Value" equals the fraction of matches where the
observed match had the highest estimated match value for the acquirer among all counterfactual mergers, and "Avg Rank" equals the average
percentile of match value for the observed match relative to all counterfactual matches. % of Optimal Value is the percentage of merger
value that the observed mergers create relative to the merger value created in the solution to the linear programming problem.

Table 10: Comparison of Predictive Accuracy with Binary Logistic Regression

Year # Mergers Revealed Preference Binary Logistic

1995 168 0.274 0.006
1996 146 0.171 0.014
1997 152 0.237 0.007
1998 221 0.118 0.014
1999 158 0.241 0.019
2000 109 0.303 0.009
2001 121 0.331 0.033
2002 93 0.355 0.011
2003 95 0.253 0.021
2004 120 0.283 0.008
2005 101 0.307 0.010

Note: The Revealed Preference column indicates the fraction of successful predictions using revealed preference method to estimate match
value for each acquirer-target pair, and then using those estimated match values to solve for the matching market equilibrium. The Binary
Logistic column indicates the fraction of successful predictions using the maximum fitted value from a logistic regression (with the same
set of predictors as enters into the match value function) for each acquirer as the prediction of the acquirer-target match.

37
 Table 11: Predicting Mergers One Year in Advance

Year Same Match Highest Value Avg Rank Unmatched # Observed Mergers Price ρ
1996 0.089 0.16 0.78 28 146 0.995
1997 0.092 0.07 0.77 28 152 0.939
1998 0.041 0.05 0.69 82 221 0.988
1999 0.013 0.12 0.77 79 158 0.997
2000 0.018 0.15 0.78 44 109 0.941
2001 0.025 0.06 0.70 81 121 0.979
2002 0.011 0.17 0.78 16 93 0.625
2003 0.000 0.21 0.84 18 95 0.994
2004 0.025 0.17 0.79 47 120 0.989
2005 0.010 0.15 0.79 69 101 0.916

Note: The estimated match values are obtained by running the maximum score estimator the previous year’s sample of merger deals. To
compute the "Same Match" fraction, compute the matching equilibrium assuming these estimated match values, and calculuate the fraction
of matches that are the same as observed. Based on this matching equilibrium, "Unmatched" is the number of acquirers-targets that are
not assigned to one another, and "Price ρ" is the correlation between the equilibrium transfers and the transfers implied by the equilibrium
solution. As for non-equilibrium measures, "Highest Value" equals the fraction of matches where the observed match had the highest
estimated match value for the acquirer among all counterfactual mergers, and "Avg Rank" equals the average percentile of match value for
the observed match relative to all counterfactual matches. Because the estimated match values are computed for the year ahead, computing
match value and % of optimal value makes less sense than in the in-sample case.

Table 12: The Effect of Eliminating Dual Bank Chartering Regulation on Bank Merger Match Value

Year # Observed Mergers Same Match Not Matched Match Value ($ millions) % Increase in Match Value
1995 168 0.232 6 294.825 54.8
1996 146 0.205 4 443.008 24.4
1997 152 0.270 1 272.677 44.0
1998 221 0.113 2 677.061 23.1
1999 158 0.215 2 359.794 35.9
2000 109 0.330 1 277.520 31.9
2001 121 0.355 3 398.945 22.1
2002 93 0.516 3 152.552 63.1
2003 95 0.316 1 187.534 53.7
2004 120 0.342 2 2028.748 3.6
2005 101 0.347 3 176.175 54.2

Note: Match value is the sum across mergers in that year of the estimated match value for merged acquirer-target pairs assuming those
acquirers and targets have the same bank charter. Unmatched acquirers and targets occur in the solution to the linear programming problem
if mergers involving these acquirers and targets would be value destroying.

38
A Alternative Specifications for the Revealed Preference Model

This appendix presents a number of alternative specifications and assumptions to the revealed preference model we

present in the main text, and contrasts the use and viability with our preferred specification.

A.1 Monte Carlo Evidence for Alternative Estimators

In addition to comparing our with-transfer data estimator to Fox (2010a)’s no-transfer-data estimator, we com-

pare our preferred method to two additional alternative estimation techniques: multinomial logit estimation of the

matching market, and maximum score estimation in a one-sided matching market.

A.1.1 Multinomial Logit

To estimate the match value function using a multinomial logit, we must assume the error term εbt is distributed

iid Type 1 Extreme Value (T1EV). Both assumptions about εbt – the T1EV distributional assumption and the

assumption of independence across acquirer-target pairs – are restrictive. Nevertheless, the multinomial logit model

is widely understood and applied in other contexts, and thus, it serves as a useful baseline for our maximum score

estimator. For this reason, we compare our with-transfers matching estimator to the multinomial logit using the

first Monte Carlo experiment from Section 1.3.

Table 13(a) presents the results from 100 replications of the multinomial logit alongside the comparable results

from the with-transfers estimator. In all cases (σ = {1, 5, 20}), the maximum score estimator exhibits similar bias

and lower RMSE. These results confirm that the maximum score approach, which accounts for endogeneity by

explicitly modeling the matching market, performs better than the standard multinomial logit.

A.1.2 One-sided Matching

Our maximum score estimators assume that acquirers and targets are two distinct groups to obtain the set of es-

timating inequalities for maximum score estimation, but this assumption is unrealistic as well. In a real world

merger market, an acquirer could become a target if equilibrium transfers change. Using revealed preference and

the fact that each target can become an acquirer and each acquirer can become a target, we derive two additional

inequalities for each comparison of an observed match to a counterfactual match.35

35 For the first inequality, consider the acquirer of one pair b trying to acquire the acquirer of another pair b0 . For this switch to be optimal

for b0 , the price p̃ must be at least f (b0 ,t 0 ) − pb0 t 0 . Hence, to rationalize the observed matching for b, the equilibrium payoff must exceed
f (b, b0 ) − p̃, which gives the first inequality. The second inequality corresponds to the counterfactual of target t trying to acquire target t 0 .

39
 f (b,t) − pbt ≥ f b, b0 − f b0 ,t 0 − pb0t 0

pbt ≥ f t,t 0 − pb0t 0

These inequalities can be combined with the inequalities in equations (2) and (3) to form the basis of another

maximum score estimator. This estimator, the one-sided matching maximum score estimator, maximizes the ob-

jective function:

M −1 M
Qtr (β ) = ∑Yy=1 ∑b=1 1 f (b,t|β ) − f b,t 0 |β ≥ pbt − pb0 t 0
y y


∑b0 =b+1

∧ f b0 ,t 0 |β − f b0 ,t|β ≥ pb0 t 0 − pbt

(10)

∧ f (b,t|β ) − pbt ≥ f b, b0 |β − f b0 ,t 0 |β − pb0 t

∧pbt + pb0 t 0 ≥ f t,t 0 |β



In Table 13(b), we present results from a Monte Carlo experiment where the underlying matching market is

based on one-sided matching with the same match value function as the first Monte Carlo experiment. In this case,

the maximum score estimator based on two-sided matching (maximizing (6)) performs as well the estimator based

on one-sided matching (maximizing (10)). In fact, the two-sided matching estimator performs slightly better. These

Monte Carlo results suggest that the primary benefit of the maximum score estimator comes from using data on

transfers in the matching market (inequalities (2) and (3)), and that the distinction between one-sided and two-sided

does not improve precision of the estimator.

A.1.3 Empirically Assessing Without-Transfers and One-sided Matching Estimators

Table 14 demonstrates how the without-transfers estimator compares with the with-transfers estimator. As the

without-transfers estimator cannot identify the scale of the match value function, we normalize the coefficient on

the assets interaction to be one. In contrast, the with-transfers estimator imposes the scale of the transfer amount on

the match value function, and as a result, the estimates from with-transfers estimation are not directly comparable

to the without-transfer estimator. Aside from the coefficient estimate on the branches estimation when we control

for MSA overlap and HHI violation, the sign pattern is the same across the two estimators.

The fact that the with-transfers estimator is on a naturally interpretable scale is a significant advantage to

40
using transfer data. Additionally, the with-transfers estimator can identify non-interactive terms, which allows us

to analyze a wider array of matching functions. For example, we may want to control for the size of the target

banking institution. Our estimator with transfer data allows us to include target-specific controls while the without-

transfers estimator does not. For this reason, we focus the remainder of the paper on results from the more precise

and interpretable with-transfers estimator.

We also run the basic multiplicative specifications using the maximum score estimator based on one-sided

matching discussed in Section A.1.2.36 Table 15 presents these results, which are qualitatively similar to the results

we find using the assumption that the merger market is two-sided (see Tables 4, 5 and 6 in the main text). Namely,

the results suggest that the interaction between acquirer and target assets and the interaction between acquirer and

target branches are robust features of the match value function, but in a horse race between the two (column 3),

the asset interaction is more important. The finding that the asset interaction is more robust is also a feature of the

less-computationally-demanding two-sided matching technique.

The fact that the one-sided matching assumption does not lead to important differences in the estimation results

suggests that the assumption that there are two distinct groups on either side of the market is not violated in a

way that perversely affects the results. For this reason and because the two-sided maximum score estimator is

appreciably easier to implement, our main specifications rely on the two-sided with transfers estimator.

A.2 Alternative Specifications for the Match Value Function

The multiplicative specification for the match value function in the main text follows much of the literature on

matching markets in that we consider interactions between attributes of each side of the market as components of

the match value function. Here, we also consider two alternatives to the match value function discussed in the main

text: (1) a quadratic loss match value function, and (2) a cross-attribute interactive match value function.

A match value function with a quadratic functional form penalizes differences between acquirer and target

attributes:
36 Another alternative we assessed in Section A.1.1 is the multinomial logit model. This setting is a computationally difficult one in which
to apply the multinomial logit framework for a couple of reasons. First, the choice set is large for each acquirer who chooses among all of
the alternative targets for that given year. This choice set is on the order of 200 targets for any given year, which makes applying a simple
multinomial logit estimator a difficult problem. We could reduce the computational difficulty by using a subset of the true choices (for
multinomial logit, McFadden (1978) proved that this technique is consistent) as Fox (2007) suggests to do with maximum score estimation.
Second, the choice set of acquirers from one year does not overlap with the choice set of acquirers from another year, and the number of
targets changes from year to year. For this reason, canned packages do not accommodate this estimation problem well. Taking these two
factors together, the standard multinomial logit is actually more difficult to apply than our preferred maximum score estimator.

41
 F (b,t) = β0 + β1 (Wb −Wt )2 + γ10 Xb + γ20 Xt + γ30 Xbt + εbt (11)

This quadratic functional form allows the researcher to estimate the degree to which acquirer banks place a

premium on similarity. For β1 < 0, the match value function implies a penalty to match value to merging with

a bank on the other side of the market that is too different. In the context of bank mergers, it is difficult to

rationalize similarity in the number of branches or the amount of assets as a motive for merging. Hence, we focus

our discussion of the empirical results on the multiplicative specification in equations (9).37

As the large-banking-network motivation to merge suggests, interactions between target and acquirer bank

attributes can be important. As an alternative to the specification in the main text, an acquirer bank with an ab-

normally large amount of assets relative to branches may demand having more branch locations to service the

customers who hold those assets. Thus, such an acquirer would derive considerably more value from target banks

with a large number of branches. For this reason, we also estimate a matching function that interacts target and

acquirer attributes across attributes (i.e., target assets with acquirer branches). To consider these interactive effects,

we also estimate the cross-attribute specification:

F (b,t) = β1Wb,1Wt,2 + β2Wb,2Wt,1 + γ10 Xb + γ20 Xt + γ30 Xbt + εbt (12)

Table 16 reports the maximum score estimates from the cross-attribute specifications in equation (12). In

particular, these specifications allow the match value to depend on the interaction between acquirer branches and

target assets, rather than the same-attribute interactions reported in Tables 4 through 6. Cross-interaction terms

allow us to investigate the extent to which mergers are motivated by the match of acquirer branches to target

assets, or the match between acquirer assets and target branches. If the number of branches represents the lending

infrastructure of the bank and bank assets are loanable funds, the match between branches at one institution and

assets at another could play an important role in determining merger value.

37 In unreported specifications, we estimate this quadratic match value function, and find that the penalty term for assets is negative and

statistically significant. In the context of our findings, this result derives from the fact that there is a positive relationship between acquirer
and target assets and branches in the bank merger market equilibrium. It is possible that these specifications pick up on the similarity of
banks in terms of number of business lines, but more similar to the tradition established in previous work in empirical matching, we find it
more plausible that the underlying mechanism driving bank merger value is a multiplicative interaction between acquirer and target banking
networks rather than matching on similarity of attributes.

42
 Based on the estimates in Table 16, the interaction between acquirer branches and target assets enters positively

and significantly into the match value function, and matters more to the match value than the interaction between

target branches and acquirer assets. Given the context, this finding suggests that bank mergers in our sample were

motivated by acquirers with excess lending opportunities who seek targets with excess loanable funds.

B Appendix Tables

Table 13: Monte Carlo Results, Comparing With-Transfers Estimator to Alternative Methods
(a) Comparison to Multinomial Logit (100 replications)
with-transfers (WT1) Multinomial Logit
σ Bias RMSE σ Bias RMSE
1 0.007 0.018 1 0.242 0.432
5 0.011 0.046 5 0.141 1.049
20 0.127 0.200 20 0.124 1.232

(b) Comparison to One-Sided Matching Model (100 replications)

one-sided matching estimator two-sided matching estimator
σ Bias RMSE σ Bias RMSE
1 0.265 0.365 1 0.253 0.356
5 0.355 0.433 5 0.262 0.368
20 0.683 0.741 20 0.377 0.513
Note: The multinomial logit estimates were produced using maximum likelihood estimation (R’s maxLik package). The estimates for one-
sided matching were produced by maximizing the objective function (10), and the two-sided with-transfers estimates in this table were
produced by maximizing (6) using R’s differential evolution routine (package: DEoptim by Mullen et al., 2011). For both methods, the scale
is normalized by setting the coefficient on the interaction term Ab At to be 1. In the differential evolution method, we set the number of
population members to be 50, the scaling factor to be 0.5, the optimization window for the parameter space [0, 50] and used the classical
DE strategy (strategy = 1). The true standard deviation of the observed portion of the match value value function Ab At + 1.5Bb Bt is 28.15.

43
 Table 14: Maximum Score Estimates of Match Value Function (with-transfers versus without-transfers)

(1) (2) (3) (4)

log(Ab )At 1 1 0.02 0.02
(normalized) (normalized) (-7.33, 0.03) (-0.06, 0.03)
log(Bb )Bt 14.53 -6.18 0.84 1.29
(6.02, 48.56) (-16.66, 3.37) (0.62, 646.32) (0.54, 7.24)
MSA Overlap 975.94 654.61
(871.89, 990.29) (520.83, 882.23)
HHI Violation Dummy 249.18 171.77
(-515.77, 723.57) (-508.77, 688.71)
Number of Observations 1484 1484 1484 1484
Percent of Ineq. 0.75 0.95 0.20 0.74

Note: Columns (1) and (2) use the without-transfers maximum score estimator while Columns (3) and (4) are the corresponding specifi-
cations using our with-transfers maximum score estimator. 95 percent confidence intervals in parentheses. Point estimates are generated
by running the differential evolution optimization routine using R’s DEoptim package (Mullen et al. 2011) For differential evolution, we
use 100 population members, scaling parameter 0.5 and we employ the classical differential evolution strategy (strategy =1). For point
estimates, we run the optimization routine for 20 different starting points (seeds) and select the run that achieves the largest value of the ob-
jective function. For confidence intervals, we use the subsampling procedure described in Politis and Romano (1992). We set the subsample
size to be 500 (approximately 1/3 to 1/4 the total sample size) and randomly generate 100 replications of the routine to obtain confidence
bounds.

Table 15: Maximum Score Estimation of the Match Value Function (one-sided matching)

(1) (2) (3)

At -761.83 -843.54
(-860.29, -255.48) (-927.19, -436.31)
log(Ab )At 102.43 111.54
(34.55, 113.22) (58.16, 125.18)
Bt -663.47 666.20
(-876.87, -419.85) (-448.43, 759.46)
log(Bb )Bt 197.93 -236.02
(127.61, 243.18) (-262.09, 145.56)
Number of Observations 1484 1484 1484
Percent of Ineq. 0.29 0.28 0.28

Note: 95 percent confidence intervals in parentheses. Point estimates are generated by running the differential evolution optimization routine using R’s
DEoptim package (Mullen et al. 2011) For differential evolution, we use 100 population members, scaling parameter 0.5 and we employ the classical
differential evolution strategy (strategy =1). For point estimates, we run the optimization routine for 20 different starting points (seeds) and select the run that
achieves the largest value of the objective function. For confidence intervals, we use the subsampling procedure described in Politis and Romano (1992). We
set the subsample size to be 500 (approximately 1/3 to 1/4 the total sample size) and randomly generate 100 replications of the routine to obtain confidence
bounds.

44
 Table 16: Cross-Attribute Specifications of the Merger Match Value Function

(1) (2)
At 196.18 -140.52
(83.04, 245.06) (-302.67, 301.66)
Bt -6.36 -31.56
(-25.27, 125.23) (-332.38, 51.17)
Ab Bt -42.41 -21.23
(-161.00, 722.70) (3.37, 745.12)
Bb At 669.61 941.86
(472.42, 941.43) (40.53, 969.80)
MSA Overlap 835.86
(536.96, 973.70)
HHI Violation Fraction 648.64
(156.30, 898.26)
Target HHI 0.00
(-0.03, 0.09)
Number of Observations 1484 1484
Percent of Ineq. 0.38 0.80

Note: In these specifications, At , Ab , Bt , and Bb are scaled to have mean zero and standard deviation one. 95 percent confidence intervals in parentheses. Point
estimates are generated by running the differential evolution optimization routine using R’s DEoptim package (Mullen et al. 2011) For differential evolution,
we use 100 population members, scaling parameter 0.5 and we employ the classical differential evolution strategy (strategy =1). For point estimates, we run
the optimization routine for 20 different starting points (seeds) and select the run that achieves the largest value of the objective function. For confidence
intervals, we use the subsampling procedure described in Politis and Romano (1992). We set the subsample size to be 500 (approximately 1/3 to 1/4 the total
sample size) and randomly generate 100 replications of the routine to obtain confidence bounds.

Table 17: Year-by-Year Maximum Score Estimates of Merger Value Function

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
At -32.51 11.46 -37.29 -36.29 -16.22 -94.64 -24.88 -18.02 -17.26 -26.56 -0.54
log(Ab )At 4.84 -1.73 6.37 4.07 2.05 11.30 3.67 2.20 2.09 3.30 0.20
Bt -41.90 -350.33 -1.90 -102.53 -29.90 -126.04 12.37 253.44 64.62 32.86 -59.18
log(Bb )Bt -14.57 112.42 -36.57 31.66 -9.16 -1.93 -3.28 -51.32 -5.17 -11.16 13.11
MSA Overlap 882.96 863.58 756.03 964.11 944.07 601.12 667.12 996.31 778.76 970.19 974.55
HHI Violate -77.96 104.76 -52.04 -28.13 -629.68 297.22 -531.91 -80.24 525.34 -700.69 -272.49
Percent of Ineq. 0.68 0.71 0.60 0.79 0.78 0.53 0.66 0.87 0.81 0.75 0.83
# of Observed Mergers 168 146 152 221 158 109 121 93 95 120 101

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
At -12.98 -22.77 -151.37 -53.63 -2.25 -66.27 6.43 -7.58 -33.04 -3.33 -9.18
log(Ab )At 1.91 2.33 18.75 7.09 0.78 7.08 -1.17 0.91 4.06 0.37 1.31
Bt -305.04 -439.29 746.71 -297.67 -240.22 -799.45 -163.75 93.73 -78.87 -233.55 53.74
log(Bb )Bt 34.29 178.10 -177.51 59.89 26.78 176.63 83.45 -12.42 41.27 54.49 -19.07
MSA Overlap 987.74 705.71 914.54 812.63 954.18 803.20 670.95 788.70 700.07 684.55 984.29
HHI Violate 880.55 492.05 296.90 26.84 -502.43 78.37 -484.33 -655.36 -924.83 -467.82 628.12
Same Charter -719.91 13.74 -222.02 -607.33 -250.39 924.67 -151.97 -233.28 -273.25 -481.89 -85.72
(Same Charter)*(MSA Overlap) 636.47 980.69 463.34 999.75 621.54 120.32 831.79 453.27 874.67 820.17 468.25
Percent of Ineq. 0.82 0.68 0.57 0.81 0.73 0.54 0.65 0.86 0.89 0.81 0.87
# of Observed Mergers 168 146 152 221 158 109 121 93 95 120 101

45