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A New Application of Sustainable Growth: A Multi-Dimensional Framework for Evaluating the Long Run Performance of Bank Mergers


  • Gerard T. Olson,

  • Michael S. Pagano

    Corresponding authorSearch for more papers by this author
    • The authors are both from Villanova University. This paper was originally circulated under the title ‘The Long-Term Impact of Bank Mergers on Sustainable Growth and Shareholder Return’. The authors wish to thank an anonymous referee for helpful comments. In addition, they thank Bill Lang and the Office of the Comptroller of the Currency for graciously providing some of the state banking data used in the analysis and David Nawrocki for providing some of the bank index data. The views expressed in this paper are those of the authors and do not represent those of the Office of the Comptroller of the Currency or the Department of Treasury. The authors also thank seminar participants at the 2003 Financial Management Association and 2004 Eastern Finance Association annual meetings, Villanova University, and Temple University for their comments.

Michael S. Pagano, Villanova University, College of Commerce and Finance, Department of Finance, Villanova PA 19085, USA.


Abstract:  We study the mergers of US publicly traded bank holding companies during 1987–2000 and find that the acquiring firm's sustainable growth rate is an important determinant of the cross-sectional variation in the merged entity's long-term operating and stock performance. The most economically significant determinants of the merged bank's abnormal stock return performance are the acquiring bank's estimated sustainable growth rate prior to the acquisition, as well as post-acquisition changes in this growth rate, and the bank's dividend payout ratio. Our findings are robust even after controlling for several potentially confounding factors.