Cost Inefficiency, Policy Uncertainty, and the Acquisition Discount in Banking

We investigate bank cost inefficiency to explain the acquisition discount in mergers and acquisitions. Results show gains are concentrated among inefficient acquirers of non-listed targets that are relatively more efficient than the acquirers themselves. Moreover, economic policy uncertainty has a negative impact on acquirer returns, but non-listed-target acquisitions mitigate this effect. While post-acquisition cost efficiency remains largely unchanged, long-term buy-and-hold returns indicate a delayed market recognition of acquisition-related synergies. Our evidence confirms cost inefficiency is a key driver of the acquisition discount and highlights how relative cost inefficiency and macro-level uncertainty jointly shape market responses to bank mergers and acquisitions.