Intra-industry signals embedded in bank acquisition announcements

Bank acquisitions have increased in recent years, as more banks attempt to exploit potential synergies, economies of scale, and other benefits. Numerous studies have determined that bank acquisitions generate strong positive valuation effects for targets on average, while the evidence of the impact on acquirers is mixed. Our objectives are: (1) determine whether the announcement of a bank acquisition transmits intra-industry signals; (2) explain why the intra-industry effects vary across acquisition announcements; and (3) explain why the valuation effects of individual rival banks vary. We find that bank acquisition announcements generate significant positive intra-industry effects, on average.The intra-industry effects of rival bank portfolios are not uniform across announcements, as they are conditioned by variables that could signal information about the probability that rival banks will become takeover targets. The valuation effects of rival bank portfolios are positively related to the valuation effects of the target banks, and inversely related to the size and prior performance of rival bank portfolios. Furthermore, the valuation effects are more favorable for individual rival banks that are ultimately acquired. To the extent that these variables reflect the probability of being acquired in the future, the intra-industry effects appear to be more favorable for acquisitions in which there is a higher probability that the corresponding rivals will become targets. Overall, investors discriminate based on event-specific and rival bank-specific characteristics when interpreting the signal transmitted as a result of bank acquisitions.     

The fading stock market response to announcements of bank bailouts

We analyze the effects on bank valuation of government policies aimed at shoring up banks’ financial conditions during the 2008–2009 financial crisis. Governments injected into troubled institutions massive amounts of fresh capital and/or guaranteed bank assets and liabilities. We employ event study methodology to estimate the impact of government-intervention announcements on bank valuation. Using traditional approaches, announcements directed at the banking system as a whole were associated with positive cumulative abnormal returns, whereas announcements directed at specific banks with negative ones. Findings are consistent with the hypothesis that individual institutions were reluctant to seek public assistance. However, when we correct standard errors for bank-and-time effects, virtually all announcement impacts vanish in Europe, whereas they weaken in the United States. The policy implication is that the large public commitments were either not credible or deemed inadequate relative to the underlying financial difficulties of banks.     

The Wealth Effects of Bank Financing Announcements in Highly Leveraged Transactions

We analyze the effect of financing announcements of highly leveraged transactions (HLTs) on the stock prices of the banks that lead HLT-lending syndicates. For our sample of 41 HLTs, we document that the first HLT and bank financing announcements result in positive wealth effects for the lending banks. We also find that these wealth effects are lower in 1985, for smaller HLTs, and for banks with a high loan loss reserve to total asset ratio. Finally, we report that Leveraged Buyout (LBO) targets gain about 2 percent, whereas leveraged recap targets lose about 2 percent, when the first bank financing agreement is announced.     

MARKET REACTION TO NATIONAL DISCRETION IN IMPLEMENTING THE BASLE ACCORD

We report the wealth effects among banks in the United States, Japan, Canada, and the United Kingdom in reaction to public announcements concerning their respective national implementation of the 1988 Basle Accord, an international risk-based capital regulatory agreement. Previous survey findings indicate bankers in different countries perceive that national discretion could threaten the competitive equity goals of the new risk-based capital rules. Based on a multivariate regression model using seemingly unrelated equations, we find significantly positive and negative market reactions by bank investors to individual announcements of different countries' post-Accord capital rules. However, no particular country's banks were systematically advantaged or disadvantaged with national discretion announcements viewed in aggregate. Although national discretion does affect bank wealth, the evidence does not suggest that national implementation compromises the competitive goals of the Accord.     

Bank incentives and suboptimal lending decisions: Evidence from the valuation effect of bank loan announcements in Japan

Using a sample of bank loan announcements in Japan, we examine whether or not banks have incentives to engage in suboptimal lending that results in wealth transfer from the banks to the borrowing firms. We find that abnormal returns for borrowing firms are significantly positive, but those for lending banks are sometimes significantly negative. Furthermore, the announcement returns for borrowing firms are negatively related to those for lending banks, especially when poorly performing firms borrow from financially healthy (low-risk) banks. Our results suggest that the positive valuation effect of bank loan announcements for borrowing firms is mainly due to a wealth transfer from lending banks.     

The Market Reaction to the Disclosure of Supervisory Actions: Implications for Bank Transparency

We examine the stock market reaction to announcements of formal supervisory actions. We find that the variation in the quality and timeliness of disclosure by U.S. banks explains much of the variation in the market's reactions. We also find that these announcements can cause spillover effects. However, rather than representing contagion, these spillover effects are consistent with enhanced transparency. Only banks in the same region as the announcing bank, with similar exposures, are affected. Thus, enhanced disclosure can improve the allocation of resources in the banking system. Journal of Economic Literature Classification Numbers: G21, G28.     

When bank loans are bad news: Evidence from market reactions to loan announcements under the risk of expropriation

In this paper we investigate whether inefficient bank loans can reduce the value of borrowing firms when expropriation of the stock of minority shareholders by controlling shareholders is a major concern. Using data from Chinese banks, we find that bank loan announcements generate significantly negative abnormal returns for the borrowing firms. In line with this expropriation view, negative stock price reactions following bank loan announcements are concentrated in firms that are perceived to be more vulnerable to expropriation by controlling shareholders. Finally, we find evidence that a negative relationship between market reactions and firm vulnerability to expropriation exists only when firms borrow from the least efficient banks.     

The light and dark side of TARP

This paper empirically investigates the impact of the first announcement of TARP, the announcement of revised TARP, respective capital infusions under TARP–CPP and capital repayments on changes in shareholder value and the risk exposure of supported US banks. Our analysis reveals a light and a dark side of TARP. While announcements as well as capital repayments may provoke positive wealth effects and a decrease in bank risk, equity capital injections to banks are observed to be a severe impediment to restore market confidence and financial stability. Furthermore, while TARP announcements and capital injections may increase systemic risk, no significant effect on systemic risk is found for capital repayments.     

Hostile bank takeover offers : Analysis and implications

A comparison of the financial characteristics of banks involved in hostile takeover bids with a control group of nonhostile bank mergers indicates: (1) hostile targets experience abnormal returns that are significantly greater than for the targets of nonhostile bank mergers; (2) hostile bidders experience negative abnormal returns that are insignificantly different than for bidders involved in nonhostile bank mergers; (3) hostile bank acquisition announcements produce positive net wealth effects which are larger than the wealth effects of nonhostile acquisitions; (4) a Logit regression model using financial ratios, stock price data, and ownership data is able to distinguish between hostile and nonhostile targets.     

Some evidence on the uniqueness of bank loans

This paper presents evidence that banks provide some special service with their lending activity that is not available from other lenders. I find evidence that bank borrowers, not CD holders, bear the cost of reserve requirements on CDs. In addition, I find a positive stock price response to the announcement of new bank credit agreements that is larger than the stock price response associated with announcements of private placements or public straight debt offerings. Finally, I find significantly negative returns for announcements of private placements and straight debt issues used to repay bank loans.     

Monetary policy effects in times of negative interest rates: What do bank stock prices tell us?

This paper investigates bank stock performance following different monetary policy actions in times of positive and negative interest rates. Controlling for the broader stock market, monetary policy announcements that cause an unanticipated downward shift in the yield curve and a flattening of the shorter-end of the yield curve are found to persistently reduce bank stock prices once the interest rate environment is negative. Consistent with the deposits channel of monetary policy, the effects are larger and more persistent for banks that are relatively dependent on deposit funding. By contrast, a surprise movement in the slope of the longer-end of the yield curve does not impact bank stock prices in times of negative interest rates. Accounting data confirm that a parallel drop in the yield curve following a monetary policy decision in a negative interest rate environment hurts banks through shrinking deposit margins.     

Competitive and value effects of bank privatization in developed countries

A special issue of the Journal of Banking and Finance (2005) devoted to the performance of privatized banks in middle- and low-income countries shows mixed results. In this paper, we present evidence that shows that privatized banks in developed countries have experienced significant improvements in operating performance. The improvement in performance remains significant after controlling for persistence in bank performance. A comparison of the performance of privatized banks in developed and developing countries suggests that privatization has encouraged excessive risk taking among privatized banks in developing countries, with the consequence that those banks carry large non-performing assets than their counterparts in the developed countries. We also observe that consistent with the competitive effects hypothesis, investors view privatization announcements as foreshadowing bad news for rival banks.     

Who Benefits from Deregulating the Separation of Banking Activities? Differential Effects on Commercial Bank,Investment Bank,and Thrift Stock Returns

We analyze the deregulation impact on commercial banks, investment banks, and thrifts associated with four major events progressively integrating commercial and investment banking activities in the United States during the 1990s. We find that commercial banks are the only group to react favorably to Federal Reserve announcements relaxing firewalls and easing restrictions on commercial bank revenues from investment banking activities. These regulations primarily benefit large banks. The Bankers Trust acquisition announcement of investment bank Alex Brown is associated with increased wealth for each of the three types of financial service institutions. At the eventual deregulation of the financial services industry, with the passage of the Financial Services Modernization Act in 1999, the values of commercial banks and investment banks increase significantly although thrifts are not affected.     

Market reaction to announcements of legislative changes and Canadian bank takeovers of Canadian investment dealers

This study examines the market reactions of Canadian banks and investment dealers to regulatory changes regarding the ownership of investment dealers and to announcements of bank takeovers of investment dealers. The statistically significant and negative abnormal returns for the acquiring banks suggest that any potential benefits from economies of scope in joint bank/brokerage activities were totally reflected in the offering prices banks paid to target investment dealers. Consistent with the literature on mergers, positive and statistically significant excess returns are exhibited by the acquired investment dealers prior to takeover announcements. In-play and out-of-play rival (nontarget) investment dealers exhibit statistically significant positive and no abnormal returns, respectively. The findings of this study are consistent with competition in the market for the corporate control of investment dealers, and not with decreased competition in the brokerage industry. The findings imply that consumers of brokerage services are not harmed by takeovers. These findings may be useful to participants in the U.S. and Japanese financial markets as these countries undergo reforms similar to those recently experienced in Canada.     

The impact of IMF term loans on US bank creditors’ equity values: an event study of South Korea's case

This study investigates whether the IMF term loan announcements to South Korea in late November and early December 1997 significantly increased the implicit value of the U.S. bank loans and investments to South Korea and hence, the equity values of its U.S. bank creditors. Using both the market model and the SUR model, this paper examines the potential abnormal performance of a total of 230 U.S. banks during mid-November to early December 1997. The findings show that there was a statistically significant positive equity response to the international bank creditors during the major event announcements. Further, the evidence shows the existence of different pricing behavior of different groups: groups that were more exposed experienced a more positive equity-price response.     

IMF bailouts, contagion effects, and bank security returns

The Asian financial crisis that started in mid-1997 led to the International Monetary Fund's (IMF) bailout of three previously high growth economies: Thailand, Indonesia, and Korea. Using data for 114 large banks from 16 countries worldwide, we study the impact of the IMF bailout announcements on bank security returns. The announcement that the IMF will provide a rescue package for a country has a positive impact on domestic bank stock prices in the countries receiving the bailouts, which supports the view that these bailouts help ameliorate systemic risk. Our results show that banks in the nonbailout countries generally experience either insignificant or negative abnormal returns, which is contrary to the view of opponents of IMF bailouts, who argue that these bailouts lead to moral hazard among international banks. Our results support the view that the reaction of investors differs from bank to bank, but consistent with the contagion and the heterogeneous creditor hypotheses, banks' stock price reactions are not proportional to their loan exposure.     

Information Contagion and Bank Herding

We show that the likelihood of information contagion induces profit-maximizing bank owners to herd with other banks. When bank loan returns have a common systematic factor, the cost of borrowing for a bank increases when there is adverse news on other banks since such news conveys adverse information about the common factor. The increase in a bank's cost of borrowing relative to the situation of good news about other banks is greater when bank loan returns have less commonality (in addition to the systematic risk factor). Hence, banks herd and undertake correlated investments so as to minimize the impact of such information contagion on the expected cost of borrowing. Competitive effects such as superior margins from lending in different industries mitigate herding incentives.     

DO BANK RELATIONSHIPS MATTER IN PUBLIC DEBT OFFERINGS?

Finance theorists have argued that banks have a comparative advantage over public debtholders and other suppliers of debt both in gathering information about and in monitoring corporate borrowers. Although underwriters of public debt issues and private placements have access to inside information when executing specific transactions, commercial bankers have ongoing relationships with their corporate borrowers that have often been built up over years. Perhaps more important, banks are also often in a better position and have stronger incentives than a dispersed collection of bondholders to keep tabs on what the borrowers do after receiving the capital.
This theoretical argument received striking empirical support from a study by Chris James published in 1987 in the Journal of Financial Economics. Entitled "Some Evidence on the Uniqueness of Bank Loans," the study documented that announcements of new bank lending aggreements by public firms are received positively, on average (and in a large majority of cases) by the stock market. This finding offered a pointed contrast to the neutral to sharply negative stock-price responses that accompany announcements of almost all other kinds of securities offerings, including private placements of debt and public offerings of straight debt.
In this article, the authors discuss their own recently published study that provides another piece of evidence of the value added by banking relationships. Specifically, the authors report that the first public debt offerings of companies with bank relationships carry spreads that are 85 basis points less than the spreads of initial debt issues by comparable firms without bank relationships. As the authors interpret their findings, a banking relationship not only helps to "certify" the value of corporate borrowers to their stockholders, but also provides other lenders with valuable "cross-monitoring" benefits that are reflected in lower borrowing costs.     

Examining bank SEOs: Are offers made by undercapitalized banks different?

Despite extensive monitoring, banking operations are often considered opaque, and despite explicit capital adequacy regulation, banks may have substantial discretion in their financing. Both monitoring and capital regulation have changed substantially over time, with the adoption of FDICIA being one important breakpoint. This article empirically studies seasoned equity offerings (SEOs) by banks to understand how opacity and capital regulation interact to determine the timing of bank SEOs and their market valuation. SEOs both by banks that are undercapitalized relative to regulatory standards and also well-capitalized banks are fully discretionary when it comes to SEOs, even before FDICIA. Both undercapitalized and well-capitalized banks experience similar and significantly negative stock price reactions to SEO announcements, and also have similar prior patterns of insider trading and similar economic drivers of the issuance decision. Moreover, post-SEO abnormal stock returns are similar to benchmark returns for both types of issuers in the long run, suggesting that, contrary to the well-documented evidence for industrial SEOs, investors understand the value implications of bank SEOs upon announcement. The evidence implies that undercapitalized banks' SEOs are more discretionary and that all bank SEOs are less opaque than implied by earlier studies.     

Stale Information,Shocks, and Volatility

We propose a new approach to measuring the effect of unobservable private information on volatility. Using intraday data, we estimate the effect of a well‐identified shock on the volatility of stock returns of European banks as a function of the quality of public information available about the banks. We hypothesize that as publicly available information becomes stale, volatility effects and its persistence increase, as private information of investors becomes more important. We find strong support for this idea in the data. We further show that stock volatility is higher just before important announcements if information is stale.