Wall Street bids up the stock price of merging banks that announce plans to consolidate branches and cut employees, a recent study by the Federal Reserve Bank of Dallas said.

On average, the five mergers in 1995 that involved banks with the largest number of overlapping offices and branches resulted in price gains of 13.28% for the targeted banks and 2.8% for the acquiring institution, Dallas Fed economist Thomas F. Siems wrote in the August issue of Financial Industry Studies. Normally an acquirer's stock drops when a merger is announced, he said.

For example, Chase Manhattan Corp. and Chemical Banking Corp. announced in August 1995 that their union would eliminate $1.5 billion in costs over three years. Their stocks then rose 12.5% and 10.5% respectively, Mr. Siems noted.

"Investors like big market overlaps with opportunities for cost reduction, more than reaching out into new territories that don't have big overlap," Mr. Siems said.

Looking more broadly at stock prices the day before and after a merger announcement, Mr. Siems found that 18 of 19 banks targeted for a takeover in 1995 rose an average of 13.04%. By contrast, 11 of 19 acquiring banks saw their stock value decline an average of 1.96%.

Mr. Siems dismissed the conventional wisdom that investors reward mergers that increase market concentration. He said short-term stock prices for acquiring banks with the five largest increases in market concentration all fell. The average decline was 2.87%.

"You would think investors would want to reward mergers that result in monopolies, but there's no evidence to support that," he said. "I think this is good news for our free market system, and I don't think we should lose any sleep over the fact that these consolidations continue."

Gregg Novek, domestic bank analyst and senior vice president at Thomson BankWatch in New York, said the study rings true.

"Investors are hanging their hats on cost-cutting because that's a proven success story," Mr. Novek said. "They've had a more difficult time with the revenue-generating side, because that's less predictable and less proven."

But while attractive now, cost-cutting cannot continue forever, said Sharon Haas, executive vice president at Thomson BankWatch, which is affiliated with American Banker.

"We're at an industry crossroads right now," she said. "There's only so many years of zero-based budgeting one can do, and investors are wanting to see more revenue growth."

Mr. Shea writes for the Medill News Service.

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