Bank Profitability, Mergers and Acquisitions: An Empirical Analysis for the US Economy

Mergers and acquisitions (M&A) are popular strategies deployed by financial institutions to expand their balance sheets and consequently their market share. Economic and regulatory forces over the prior 30 years have been instrumental in driving M&A activity within the financial sector, yet limited conclusive evidence has been published regarding the relationship between bank profitability in relation to M&A activity. This paper utilizes linear OLS and Generalized Method of Moments models to evaluate the significance of M&A activity in relation to financial parameters, and to estimate its relevance for bank profitability in the US economy for the period 1993-2019. The results show that the relationship between M&A activity and financial sector profitability is not entirely clear. Variation in return on equity, return on assets, and net interest margin was not found to be significantly affected by the volume of M&A over the past three decades. Our analysis also highlights that other efficiency parameters are instrumentally more significant determinants of bank profitability than institution size and capital structure management.