Journal of Applied Finance & Banking

Bank Profitability and Mergers in the German Cooperative Banking Sector

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• Abstract

   

  This paper evaluates bank performance as a determinant of mergers in the German cooperative banking sector. Based on annual time series data since 1990, a bivariate Vector Error Correction (VEC) model is specified and estimated. The results identify return on equity (ROE) as a driver of mergers. The higher ROE, the higher the merger intensity, defined as the ratio of mergers by the number of last years’ banks. A reverse causality cannot be found as mergers do not significantly affect ROE. The results confirm some literature findings that were obtained from cross-section data. Our findings do not confirm the hypothesis that mergers are induced by worse economic performance.

   

  JEL classification numbers: G21, G34, L25, P13.

  Keywords: Bank mergers, cooperative banks, bank profitability, VEC model.