Bank Mergers,REIT Loan Pricing and Takeover Likelihood

The impact of bank mergers on Real Estate Investment Trust (REIT) loan pricing and takeover likelihood is assessed. REITs that lose their primary banking relationship due to bank mergers pay higher interest rates on future borrowings. Bank consolidation reduces bank competition for REIT loans which affects loan pricing. Moreover, based on randomly matched samples of REITs, the results imply that firms losing their agent banks due to bank mergers and those with limited access to bank debt are more likely to be acquired while REITs associated with acquiring banks are more likely to acquire other firms. Additional analysis of the 92 merged REITs reveals that 33% of the target REITs’ banks are merged with their REIT acquirers’ banks prior to the REIT mergers while 67% of the target REITs share at least one major bank with their acquirer.     

Common Stock Returns in Corporate Takeover Bids: The Case of Brokerage House Acquisitions

This paper examines the common stock returns of three groups of bidders that purchased brokerage houses. Only in the cases of horizontal mergers, one brokerage house purchasing another, are there abnormal returns associated with the purchase. Neither bank holding company bidders nor non-financial bidders gain significantly when purchasing a brokerage house. Bank holding company bidders face considerable regulatory delays, and these economic disturbances may eliminate their gains. Bank holding company expansion into these non-bank activities does not appear, at the time of announcement, to either hurt or benefit them; hence, this expansion does not appear to further the loss exposure of the Federal Deposit Insurance Corporation.     

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.     

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.     

The valuation effects of bank mergers

This paper examines the valuation effects of a sample of 558 bank mergers from 1980–1997. The overall results indicate that bank mergers create wealth. On average over a 36-day (−30, +5) event window, targets gain over 22%, bidders break even, and combined firms gain 3%. The results further indicate that mergers in the 1990s, which have not been extensively studied in prior work, have positive effects. In the 1990s over the 36-day window: target gain significantly, bidder returns are positive and statistically larger than the mid-1980s, and combined firm returns are significantly positive. These results are consistent with the notion that bank mergers occur for synergistic reasons and are not the result of empire building. However, bidder returns are sensitive to the event window implemented. Examining returns over an 11-day (−5, +5) window, target returns remain significantly positive, while bidder returns are statistically negative, and combined firm returns are statistically positive. Results over both windows indicate that overall wealth effects from bank mergers are positive over time, particularly in the 1990s.     

The Impact of Bank Consolidation on Commercial Borrower Welfare

We estimate the impact of bank merger announcements on borrowers' stock prices for publicly traded Norwegian firms. Borrowers of target banks lose about 0.8% in equity value, while borrowers of acquiring banks earn positive abnormal returns, suggesting that borrower welfare is influenced by a strategic focus favoring acquiring borrowers. Bank mergers lead to higher relationship exit rates among borrowers of target banks. Larger merger‐induced increases in relationship termination rates are associated with less negative abnormal returns, suggesting that firms with low switching costs switch banks, while similar firms with high switching costs are locked into their current relationship.     

The Announcement Effects of U.S. versus non‐U.S. Bank Mergers: Do They Differ?

Non‐U.S. bank mergers are becoming an increasingly important part of the worldwide economic landscape. Are the market reactions to non‐U.S. bank mergers similar to the reaction in the United States? I address this question by examining abnormal returns of publicly traded partners on the announcement of forty‐one non‐U.S. bank mergers and comparing the returns with a U.S. control group. I find acquirers in non‐U.S. domestic bank mergers earn more and non‐U.S. targets earn less than their U.S. counterparts. However, for the subset of mergers in countries with relatively well‐developed stock markets, I find that partners earn similar returns.     

Announcement effects of bank mergers in Europe and the US

We investigate the announcement effect of large bank mergers in the European and US stock market. Cumulative abnormal returns are calculated on the basis of the performance vis-à-vis the market and a sector index. Mergers result in small positive abnormal returns. Target banks realize significantly higher returns than bidders. In many respects, there is a difference between the announcement effects of European bank mergers compared to those in the US.     

Bank Mergers and Small Firm Finance: Evidence from Lender Liability

As a merger approaches, the value of repeat business for the target bank can drop sharply, so loan relationships between this bank and small businesses are often disrupted. Small firms sometimes experience serious value destruction as a consequence of this sudden lack of credit. This paper shows that lender liability may result from bank mergers and bankers involved in mergers often engage in aggressive, scorched‐earth defense tactics to discourage further litigation. I summarize six lender liability cases to illustrate these points. Bank mergers have been shown to reduce credit availability in a number of studies. Since small firms depend on credit for their daily existence, owners of small firms do have a reason to fear a merger of their bank with a larger institution. Analyzing merger effects with survey data of firms obtained after a bank merger, an empirical strategy used in a number of studies, raises problems since the only firms considered are the ones that survived the bank merger. Suggesting that the problem will cure itself in the long run, an argument advanced in other studies, ignores small firms' daily dependence on credit. In the long run we are all dead. Bank examiners need to evaluate an institution's litigation experience and measure a bank's organizational architecture – its ethical climate. Banks which are repeatedly involved in lender liability lawsuits should be denied future mergers until there is a change in organizational architecture. To assist in evaluating organizational architecture, banks should be required to report their litigation expense on their call reports. Furthermore, regulators should seriously consider the recent suggestion of Carow, Kane and Narayanan (2006) that they take steps to ensure that participants in bank mergers preserve target bank relationships. Otherwise negative effects on small business lending and economic growth will continue as bank consolidation proceeds.     

INTERSTATE BANKING DEREGULATION AND THE CHANGING NATURE OF BANK MERGERS

We examine a sample of 443 bank mergers between publicly traded banks announced during the 1990s to investigate empirically the role of full interstate banking deregulation. The pre‐deregulation 1990s are characterized by value creation, with mergers involving a high degree of branch overlap experiencing significant announcement gains. Bank mergers in the post‐deregulation 1990s, however, fail to create value, and mergers with a high degree of branch overlap actually experience significant losses. Consistent with prior research, these valuation consequences are magnified for large bank mergers in the 1990s. Overall, our results are consistent with the broader literature on corporate control, suggesting that an economic shock can materially alter industry structure and the economic rationale for the efficient reallocation of assets through merger activity.     

Bidder returns in interstate and intrastate bank acquisitions

Returns to bidders are examined for 108 bank acquisitions over the 1981–1987 period. These returns provide evidence on the conflict-of-interest hypothesis and the hubris hypothesis, both of which predict negative returns to bidders, versus the shareholder wealth maximization model that predicts positive (or at least non-negative) returns. Further evidence on these hypotheses is provided from the returns on 18 defensive acquisitions. Consistent with the conflict-of-interest and hubris hypotheses, announcement period returns are negative and statistically significant both for interstate and intrastate acquisitions. However, bidder returns to interstate bank acquisitions do not differ significantly from intrastate mergers.     

Banks and Corporate Decisions: Evidence from Business Groups

Banks who can influence clients' governance may steer those clients into mergers to reduce the banks' own risk. Empirical evidence based on Japan's mergers and acquisitions (M&As) during the country's 1990s banking crisis indicates that acquirers with stronger bank ties made acquisitions that they would not have normally made. These acquirers lost more shareholder value via mergers than acquirers with weaker bank ties. The banks' risk was reduced, while the banks' shareholders gained significant excess returns from their borrowers' mergers. This paper offers implications for corporate governance of firms with strong bank ties and advances the existing knowledge on business groups.     

Systemic risk and bank consolidation: International evidence

This paper analyzes the systemic risk effects of bank mergers to test the “concentration-fragility” hypothesis. We use the marginal expected shortfall as well as the lower tail dependence between a bank’s stock returns and a relevant bank sector index to capture the merger-related change in an acquirer’s contribution to systemic risk. In our empirical analysis of a dataset of international domestic and cross-border mergers, we find clear evidence for a significant increase in the merging banks’, the combined banks’ as well as their competitors’ contribution to systemic risk following mergers, thus confirming the “concentration-fragility” hypothesis.     

Bank capital in the crisis: It's not just how much you have but who provides it

Bank capital is the cornerstone of bank regulation and is considered a key determinant of a bank's ability to withstand economic shocks. In the area of bank capital regulation, the general view is that more bank capital is better, irrespective of who provides it. In this paper, we investigate whether the investment horizon of bank capital providers matters for bank performance during the recent financial crisis. We observe that banks with more short-term investor ownership have worse stock returns during the crisis. Further exploration suggests that this is partially because banks with higher short-term investor ownership took more risk prior to the crisis but mainly because they experienced higher selling pressure during the crisis. Our results confirm the economic benefit of bank capital in helping banks to perform better during crises. However, when we decompose bank capital by the nature of its providers, we show that more capital is associated with worse performance when it is provided by short-term institutional investors.     

Are Differences in Acquiring Bank Profit Efficiency Priced in Financial Markets?

We analyze 271 bank mergers for 1986–2001 to attempt to determine if differences among acquirers in profit efficiency are priced in financial markets. We find that the acquirer’s pre-merger profit efficiency (as well as its experience in handling other mergers) has positive effects on the wealth of the acquiring bank’s shareholders. We also find that more profit efficient acquiring banks produce lower abnormal returns for the target, suggesting that well managed (i.e., more profit-efficient) banks are less likely to overpay when they enter into a merger agreement. Financial market participants apparently take something akin to the econometric concept of profit efficiency into account when they make decisions about bank stock purchases and sales around merger announcement dates.      

Does the Stock Market Compensate Banks for Diversifying into the Insurance Business?

This paper explores a wide range of corporate restructurings, all available deals from wire services, in the banking and insurance sectors that led to bancassurance ventures. An event study methodology is employed to calculate excess returns on and around the deals’ announcement date. Using both univariate and multivariate analysis the paper finds bank driven mergers, deal's size and regional categorization all triggering positive and significant market reactions. Unlike the univariate framework, multivariate analysis shows that geographic focus and language are not significant factors. The results also indicate that markets are indifferent with respect to bank withdrawals from the bank‐insurance operations. Finally, Canadian, U.S. and European bank‐insurance deals produce positive results, while Australasian bidders offer statistically insignificant equity returns.     

Cross-border bank mergers: What lures the rare animal?

Although domestic mergers and acquisitions (M&As) in the financial services industry have increased steadily over the past two decades, international M&As were until recently relatively rare. Moreover, the share of cross-border mergers in the banking industry is low compared with other industries. This paper uses a novel dataset of over 3000 mergers that took place between 1985 and 2001 to analyze the determinants of international bank mergers. We test the extent to which information costs and regulations hold back merger activity. Our results suggest that information costs significantly impede cross-border bank mergers. Regulations also influence cross-border bank merger activity. Hence, policy makers can create environments that encourage cross-border activity, but information cost barriers must be overcome even in (legally) integrated markets.     

Model uncertainty and systematic risk in US banking

This paper uses Bayesian Model Averaging to examine the driving factors of equity returns of US Bank Holding Companies. BMA has as an advantage over OLS that it accounts for the considerable uncertainty about the correct set (model) of bank risk factors. We find that out of a broad set of 12 risk factors only the market, real estate, and high-minus-low Fama–French factors are reliably related to US bank stock returns over the period 1986–2010. Other factors are either only relevant over specific subperiods or for subsets of bank holding companies. We discuss the implications of our findings for empirical banking research.     

What do a bank’s legal expenses reveal about its internal controls and operational risk?

Excessive (substantially above peer) litigation against a bank is indicative of operational risk because it often suggests failure to maintain a strong system of internal control. We examine the relation between bank performance and weak internal control using legal expense as a proxy. We find that legal expense is a strong determinant of loan losses and stock returns. Bank regulators should require reporting of legal expense on call reports to help identify institutions with weaknesses in internal control. Current reporting creates unnecessary information asymmetries because investors are not well informed about operational risk, leading to mispricing of bank securities.     

Bondholders’ wealth effects in domestic and cross-border bank mergers

The recent credit crisis and the increased internationalization of the European banks have given the debate about the role of national regulators a renewed urgency. We therefore investigate the determinants of bondholders’ abnormal returns for both domestic and cross-border bank merger announcements that involve European acquirers for the period 1998–2002. We find that bondholders’ abnormal returns are higher for Domestic Mergers than cross-border mergers, in direct contrast to evidence from equity prices where no difference is found. Further investigations in which we control for the changes in market power for example suggest this result may be indicative of investors perceiving Domestic Mergers as increasing the probability of a government bailout in case of distress. Banks’ bondholders also experience higher abnormal returns when the country of the partner bank has stricter rules in relation to forbearance of prudential regulations than the own country, and when functional diversification between lending and fee/trading activities increases.