Cluster Analysis of the Financial Characteristics of Depository Institution Merger Participants and the Resulting Wealth Effects (Manuscripts‪)‬

INTRODUCTION The merger and acquisition activity of depository institutions has increased dramatically in recent years, with various theories hypothesized regarding the cause of this action. In addition, much attention has been devoted to the merger and acquisition activities of non-financial firms, with most utilizing a cross-sectional regression analysis to explain the pre- and post-merger returns of both bidders and targets. While this method has met with much success, it does suffer from some apparent weaknesses in its explanatory power. Alternative statistical techniques, many of which are found in the non-parametric realm of tests, have been implemented in attempts to offset the drawbacks of ordinary least squares regression. In this paper cluster analysis is used to analyze the mergers of depository institutions, drawing on previous work in the non-financial sector. Mergers are separated by pre-merger financial characteristics of both bidders and targets. This insures that the within-group differences are small relative to among-group differences. This provides a homogeneous group of mergers, which is analyzed for among-group differences in returns to both parties, allowing the financial data for both bidding firms and target firms to capture potential interactions among their characteristics.