| Abstract: |
The threat of entry is an important factor in the evaluation of the potential
competitive effects of proposed mergers and acquisitions. In the evaluation of
proposed bank mergers, a high probability of entry, or strong potential
competition, is often found to mitigate the potential anticompetitive effect
of a proposed horizontal merger. Because the probability of entry is not
directly observed for each local market, variables such as per capita income,
population growth and past entry are typically used to predict the probability
of future entry. This study extends previous research on the determinants of
entry into local banking markets. In addition to variables considered by past
research, such as market demographic characteristics, branching deregulation
and past merger activity, this study considers the effects on future entry of
past entry and strategic barriers to entry, which are proxied by changes in
incumbent branching, the presence of small incumbent firms and market
concentration. The analysis uses data that allow a broader definition of entry
than that used in most past research. In most of the previous studies, bank
entry is defined as the creation of a new banking institution. We show that
this definition is problematic and misses entry due to branch network
extension by existing banks, which is substantial. Results of our analysis are
consistent with past research where past research exists. In addition, we find
significant negative relationships between strategic barriers to entry and
entry. Assessment of the quantitative significance of the results, however,
finds that very large changes in the explanatory variables are needed to cause
substantial changes in the probability of entry into banking markets. |