The effect of mergers on credit union performance

The motivation for mergers in the credit union industry differs from the commercial bank industry due to the lack of residual claimants to benefit from wealth gains. In the cooperative ownership environment of credit unions, the owners/members gain utility via the rates offered for loans and deposits. Credit union regulators also gain utility when mergers remove risky credit unions from the industry. We measure these utility gains using the event study method of Bauer [Bauer, K., 2008. Detecting abnormal credit union performance. Journal of Banking and Finance 32, 573–586] employing quadrant tests based on a multivariate test of equality of centroids. We find gains to the owners/members of the target credit union and to the regulators but not to the acquiring firm. We posit that the acquiring credit unions may encounter regulatory pressure to merge. In addition, the owners/members of the acquiring firm may avoid potential disutility in the cooperative insurance environment were the target firm allowed to fail.     

The x-efficiency and allocative efficiency effects of credit union mergers

The relative efficiency effects of Australian credit union mergers are examined. The period of investigation is June 1992–June 1997, which allows the examination of 16 credit union mergers in the 1993–1994 financial year. Multiple regression is applied to examine the impact of credit union mergers on x-efficiency and allocative efficiency. The data envelopment analysis (DEA) frontier approach is used to provide measures of x-efficiency and allocative efficiency. Results provide statistical evidence that, on average, credit union mergers do not result in an increase in x-efficiency or allocative efficiency postmerger relative to other credit unions.     

Do credit unions use their tax advantage to benefit members? Evidence from a cost function

This paper examines whether the credit union income tax subsidy is passed along to members or consumed by managers. To that end, we estimate a translog cost function for credit unions and mutual thrifts that is tailored to the unique objectives of mutually owned depository institutions. We find that credit unions with residential common bonds have higher costs than mutual thrifts, but single common bond occupational and associational credit unions are more cost efficient. Thus, it appears that residential credit unions engage in expense preference behavior and hence redirect some portion of their tax benefit away from members.     

Basel III capital buffers and Canadian credit unions lending: Impact of the credit cycle and the business cycle

We take advantage of the long-standing regulation of the risk-based capital and the leverage ratio in Canada to provide empirical evidence on the relation between the credit unions' capital buffers and loans to members. Based on a unique sample of the 100 Canadian largest credit unions from 1996 to 2014, we find that both the risk-based capital buffer and the leverage buffer are positively related to changes in loans and loan growth. However, changes in these two types of buffers are negatively related to changes in the loans to assets ratios. This finding suggests that to adjust their capital buffers, Canadian credit unions curtail their loans and underscores the importance of the Basel III conservation and the countercyclical buffer requirements in fostering credit. Further, we show that the risk-based capital buffer is positively related to the credit cycle. However, a mechanical application of the rule based on the credit-to-gross domestic product (GDP) gap to activate the countercyclical buffer, would have misguided Canadian credit unions.     

Board characteristics and credit‐union performance

We examine the role of board characteristics on the performance of Australian credit unions during the period 2004–2012. Credit unions are unique as they are member‐owned institutions, and their directors are democratically elected by their members – an unusual governance structure that poses challenges for board effectiveness. We find that board remuneration, board expertise and attendance at meetings are associated with increased credit‐union performance and are consistent with the goal of maximising member benefits. While the unique features of credit unions limit the presence of external monitoring mechanisms, we provide evidence that these board characteristics are relevant for credit unions.     

INTERSTATE BANK MERGERS: THE EARLY EVIDENCE

This study examines the wealth effects of interstate bank mergers to both the acquired and acquiring firms' shareholders. While the overall results are consistent with the findings of research on nonfinancial mergers — that acquired firms' shareholders gain and acquiring firms' shareholders break even — there is evidence that the acquiring banks cannot be considered a homogeneous group. Specifically, banks involved in relatively large acquisitions earn positive and statistically significant abnormal returns and significantly outperform those involved in relatively smaller mergers. The results suggest there are differential opportunities for gain from interstate mergers, dependent upon the relative size of the acquisition and the degree to which it expands the geographic market served by the bank.     

Can mergers ensure the survival of credit unions in the third millennium?

The survival of small financial institutions in the third millennium depends on their competitiveness against large bank rivals. Accordingly, credit unions in Australia and the United States have attempted to increase efficiency through mergers. Our paper uses the data envelopment analysis methodology to evaluate the post-merger gains in technical and scale efficiency achieved by 31 Australian credit union mergers in 1993/1994 and 1994/1995, relative to non-merging credit unions. When compared with the only US study of credit union mergers [Journal of Banking & Finance 23 (1999) 367–386], our findings suggests that mergers are not associated with improvements in efficiency superior to those achieved by internal growth.     

BLACK-CONTROLLED CREDIT UNIONS: A COMPARATIVE ANALYSIS

This paper is a comparative study of black- and nonblack-controlled credit unions. The results indicate operational differences that distinguish black credit unions from previous results for black banks and black savings and loan associations. Many of these differences can be attributed to institutional characteristics resulting from the three distinct types of credit unions. The major contribution of the paper is that the striking similarities between black banks and black savings and loan associations do not in general apply to black credit unions.     

Credit unions vs. commercial banks,who takes more risk?

A unique feature of the financial services industry is that both shareholder-owned banks and member-owned credit unions coexist and compete against each other. In this study, we investigate two research questions. First, we compare risk-taking by banks and credit unions, with an additional consideration as to how regulatory oversight (state or federal) relates to such risk-taking. Second, we examine how competition affects the difference in risk-taking between these two types of financial institutions. To answer both questions, we rely on a matched sample (by loan type, size, and county) of commercial banks and credit unions, covering the period between 2010 and 2017. We use three empirical proxies for risk-taking, the Z-score, measuring an institution’s insolvency risk, as well as the ratios of non-performing loans to total loans and loan charge-offs to total loans, measuring the credit risk. Our results suggest that banks tend to engage in more risk-taking than credit unions; however, state regulatory oversight reduces the risk-taking gap, especially in terms of the Z-score. We further find that competition induces different risk-taking behaviors in banks and credit unions. Our results are robust to several alternative specifications.     

Powerful bidders and value creation in M&As

This paper explores the role of bargaining ability in corporate mergers and acquisitions (M&As) by focusing on acquiring firms with ex-ante market power—powerful bidders. Drawing from a bargaining power theoretical stance, we argue that powerful bidders create value from M&A activity by paying comparatively lower premiums. We test our empirical proposition using a sample of 9327 M&A deals announced between 2004 and 2016 by bidders across 30 countries. Contrary to the stylized fact that bidders do not gain from M&A activity, we uncover evidence suggesting that powerful bidders pay lower bid premiums and, consequently, earn positive (and relatively higher) cumulative announcement returns (CARs) from M&A deals. On average, the mean returns to powerful bidders (1.3%) are at least twice those of their less powerful counterparts (0.6%). We identify “low financial constraints” as a potential channel through which higher bidder power translates to improved deal performance. Overall, our results provide new evidence on how industry dynamics, notably bargaining power, influences M&A outcomes.     

Irish credit unions: Differential regulation based on business model complexity

This study examines the business model complexity of Irish credit unions using a latent class approach to measure structural performance over the period 2002 to 2013. The latent class approach allows the endogenous identification of a multi-class framework for business models based on credit union specific characteristics. The analysis finds a three class system to be appropriate with the multi-class model dependent on three financial viability characteristics. This finding is consistent with the deliberations of the Irish Commission on Credit Unions (2012) which identified complexity and diversity in the business models of Irish credit unions and recommended that such complexity and diversity could not be accommodated within a one size fits all regulatory framework. The analysis also highlights that two of the classes are subject to diseconomies of scale. This may suggest credit unions would benefit from a reduction in scale or perhaps that there is an imbalance in the present change process. Finally, relative performance differences are identified for each class in terms of technical efficiency. This suggests that there is an opportunity for credit unions to improve their performance by using within-class best practice or alternatively by switching to another class.     

Adopting better corporate governance: Evidence from cross-border mergers

Cross-border mergers allow firms to alter the level of protection they provide to their investors, because target firms usually import the corporate governance system of the acquiring company by law. Therefore, cross-border mergers provide a natural experiment to analyze the effects of changes in corporate governance on firm value, and on an industry as a whole. We construct measures of the change in investor protection induced by cross-border mergers in a sample of 7330 ‘national industry years’ (spanning 39 industries in 41 countries in the period 1990–2001. We find that the Tobin's Q of an industry — including its unmerged firms — increases when firms within that industry are acquired by foreign firms coming from countries with better shareholder protection and better accounting standards. We present evidence that the transfer of corporate governance practices through cross-border mergers is Pareto improving. Firms that can adopt better practices willingly do so, and the market assigns more value to better protection.     

The impact of unions on municipal elections and urban fiscal policies

The efficient decentralized provision of public goods requires that special interest groups, such as municipal unions, do not exercise undue influence on the outcome of municipal elections and local fiscal policies. We develop a new political economy model in which a union can endorse one of the candidates in a local election. A politician that prefers an inefficiently large public sector can, therefore, win an election if the union can provide sufficiently strong support during the campaign. We have assembled a unique data set that is based on union endorsements that are published in leading local newspapers. Our empirical analysis focuses on municipal elections in the 150 largest cities in the U.S. between 1990 and 2012. We find that challengers strongly benefit from endorsements in competitive elections. Challengers that receive union endorsements and successfully defeat an incumbent also tend to adopt more union friendly fiscal policies.     

Irish credit unions: Investigating performance determinants and the opportunity cost of regulatory compliance

The study investigates how producer-specific environmental factors influence the performance of Irish credit unions. The empirical analysis uses a two-stage approach. The first stage measures efficiency by a data envelopment analysis (DEA) estimator, which explicitly incorporates the production of undesirable outputs such as bad loans in the modelling, and the second stage uses truncated regression to infer how various factors influence the (bias-corrected) estimated efficiency. A key finding of the analysis is that 68% of Irish credit unions do not incur an extra opportunity cost in meeting regulatory guidance on bad debt.     

Earnings management surrounding M&A: Role of economic development and investor protection

We examine accruals based earnings management by acquiring firms surrounding merger and acquisition events from thirty countries for the period 2004–2015. We find that the acquiring firms do manage earnings surrounding mergers when the method of payment is acquirer's stock, but there is no such evidence when the method of payment is cash. We also examine whether level of economic development and country-specific institutional characteristics play any role in acquiring firms' earnings manipulation. Using two groups of countries based on the level of economic development and nine different institutional variables we find evidence that acquirers' accrual manipulation differs based on such characteristics.     

The market for private student loans: an analysis of credit union exposure,risk, and returns

Beginning in 2011, credit unions in the United States have been required to report in their quarterly call reports their holdings of private student loans. Since this time, private student loans have been the fastest growing loan product among credit unions. The empirical results here indicate credit unions respond to external market forces and internal exposure to interest rate risk in their decision to hold private student loans. The effect of which, to date, has led to lower returns on their assets and no effect on overall risk. Credit unions looking to diversify their loan portfolio should do so with caution. Private student loans being in deferral reduce both delinquency and charge-off rates, which will rise over time with their seasoning and as interest rates rise.     

The Post-Merger Performance of Acquiring Firms: A Re-examination of an Anomaly

The existing literature on the post-merger performance of acquiring firms is divided. We re-examine this issue, using a nearly exhaustive sample of mergers between NYSE acquirers and NYSE/AMEX targets. We find that stockholders of acquiring firms suffer a statistically significant loss of about 10% over the five-year post-merger period, a result robust to various specifications. Our evidence suggests that neither the firm size effect nor beta estimation problems are the cause of the negative post-merger returns. We examine whether this result is caused by a slow adjustment of the market to the merger event. Our results do not seem consistent with this hypothesis.     

AN EXAMINATION OF MERGER SYNERGISM

The empirical research discussed in this paper measures the synergistic effects of mergers on the stockholders of the acquiring and acquired firms. Synergism is defined as the incremental wealth to the shareholders of both merging firms due to the merger—net of any potential gains achievable through investors' personal diversification over the common stocks of the merging firms. Three types of mergers are identified and studied—nonconglomerate, conglomerate with increasing financial leverage, and conglomerate with decreasing financial leverage. The results indicate that these types of mergers are affected differently by the combination. Moreover, the evidence suggests operational and/or financial synergism.     

Cooperative financial institutions: A review of the literature

Financial cooperatives play an important role in the financial systems of many countries. They act as a safe haven for deposits and are major sources of credit for households and small- and medium-sized firms. A not-for-profit orientation (in many cases) and a focus on maximising benefits to members have ensured the enduring popularity and sustainability of financial cooperatives. This is particularly evident since the global financial crisis when financial cooperatives continued to extend credit to members as many profit-orientated commercial banks restricted credit to households and firms. The overarching theme of the first part of this review is the structural and behavioural characteristics of financial cooperatives. In this part we consider, the origin and diffusion of financial cooperatives, network arrangements, the business model, relationship banking, balancing the interest of members, tax treatment and regulatory framework. The second part has performance and contribution to the real economy as the overarching theme. In this part we consider, efficiency and sustainability, mergers, acquisitions and failures, the benefits (and challenges) of FinTech and the contribution of financial cooperatives to the real economy including during times of crisis. The paper concludes with a summary of what we now know (and do not know) about financial cooperatives and provides suggestions as to where future research may usefully concentrate.     

Liquidity mergers

We study the interplay between corporate liquidity and asset reallocation. Our model shows that financially distressed firms are acquired by liquid firms in their industries even in the absence of operational synergies. We call these transactions “liquidity mergers,” since their purpose is to reallocate liquidity to firms that are otherwise inefficiently terminated. We show that liquidity mergers are more likely to occur when industry-level asset-specificity is high and firm-level asset-specificity is low. We analyze firms' liquidity policies as a function of real asset reallocation, examining the trade-offs between cash and credit lines. We verify the model's prediction that liquidity mergers are more likely to occur in industries in which assets are industry-specific, but transferable across firms. We also show that firms are more likely to use credit lines (relative to cash) in industries in which liquidity mergers are more frequent.