Do CFOs matter? Evidence from the M&A process

This study examines the effect of Chief Financial Officers (CFOs) on mergers and acquisitions using a newly constructed CFO Influence Index. Because the perceived influence of CFOs is high in U.K. firms, we use that market for our analysis. We find that influential CFOs as measured by experience, stature, and pay are associated with more deal completions and the pursuit of smaller, domestic targets. High influence CFOs require less time to complete a deal and are able to identify higher quality targets for which they pay less. We also discover that firms with high influence CFOs enjoy greater long-term operating and financial performance post-merger. We conclude that influential CFOs are effective in creating shareholder value during M&A.     

What do premiums paid for bank M&As reflect? The case of the European Union

We analyze the takeover premiums paid for a sample of domestic and cross-border bank takeovers in the European Union between 1997 and 2007. We find that acquiring banks value profitable, high-growth and low risk targets. We also find that the strength of bank regulation and supervision as well as deposit insurance regimes in Europe have measurable effects on takeover pricing. Stricter bank regulatory regimes and stronger deposit insurance schemes lower the takeover premiums paid by acquiring banks. This result, presumably in anticipation of higher compliance costs, is driven by domestic deals. Similar qualitative results are found for both the entire sample and the sample of publicly traded targets.     

Is M&A different during a crisis? Evidence from the European banking sector

The financial crisis has affected the landscape of the banking sector around the world. We use a sample of transactions carried out by European acquirers in 2007–2010 to study the acquirer’s stock price market reaction to both announcements and completions of acquisitions. At the aggregate level, we find that there are no significant abnormal returns around the announcement of an acquisition while there are positive abnormal returns at completions. We study the cross-sectional determinants of abnormal returns and find that announcement returns are mainly explained by the acquirer bank characteristics, while completion returns mainly depend on opacity of the target and on the drop in idiosyncratic volatility associated with a reduction of uncertainty.     

Can firms learn by observing? Evidence from cross-border M&As

In the presence of high uncertainty and limited experience, can observing the actions of other acquiring predecessors help firms make better acquisition decisions? Using a sample of cross-border M&As conducted by US acquirers in developing countries, we document a positive and significant relationship between an acquirer's performance and its predecessors' acquisition activity. This relationship is especially pronounced in the prevalence of news events about the outcome of predecessors' acquisitions, when predecessors consist of US peers from the same industry and/or when targets are based in culturally distant countries. Our findings shed light on one channel through which information spillovers across industries and acquiring firms could be a key driver of value creation in developing market cross-border M&As.     

Does ownership concentration improve M&A outcomes in emerging markets?: Evidence from India

Using firm level data from India, we examine the impact of ownership concentration on post-M&A performance of firms. Our analysis has implications for both the M&A literature, which emphasises the role of agency conflict between managers and owners of widely held companies as a key reason for M&A failures, and the corporate governance literature, especially in the context of emerging market economies. A cautious interpretation of our results suggests that while ownership concentration may reduce the manager–owner agency conflict, it may nevertheless precipitate other forms of agency conflict such that ownership concentration may not necessarily improve post-M&A performance. In particular, our results have implications for the literature on the agency conflict between large (or majority) shareholders and small (or minority) shareholders of a company, especially in contexts such as emerging market economies where corporate governance quality is weak.     

Does takeover activity affect stock price crash risk? Evidence from international M&A laws

We exploit the staggered initiation of merger and acquisition (M&A) laws across countries as a plausibly exogenous shock to the threat of takeover to examine whether the market for corporate control has a real effect on firm-level stock price crash risk. Using a difference-in-differences regression on a large sample of firms from 32 countries, we find that stock price crash risk significantly decreases following the passage of M&A laws. This effect is stronger for firms domiciled in countries with poorer investor protection and information environments and for firms with weaker firm-level governance. Further, financial reporting opacity and overinvestment significantly decrease in the post-M&A law periods. Our study suggests that an active takeover market has a disciplining effect on managerial bad news hoarding and leads to lower future crash risk.     

What do private firms do after losing political capital? Evidence from China

This paper studies the real effects of losing political capital by exploiting exogenous shocks from the sudden deaths of politically connected independent directors in Chinese firms. Using difference-in-differences estimation, we find that upon losing political capital, a firm boosts its physical capital expenditures by 28%, or 2.93 percentage points, which is an order of magnitude larger than estimates from the United States. The loss of political capital leads to a decrease in the economic benefits a firm can obtain, in terms of bank loans, tax benefits, and government subsidies, and an increase in its production costs. Our evidence suggests that private firms use physical capital investment as a substitute for political capital.     

Do stock-for-stock merger acquirers manage earnings? Evidence from Japan

This paper examines the earnings management behavior of Japanese merger acquirers on the Tokyo Stock Exchange. Most Japanese mergers are transacted via stock swaps, when acquirers have incentive to manage pre-merger earnings to reduce the cost of acquisition. Consistent with this incentive, Japanese acquirers have significantly positive long-term abnormal accruals in the year prior to the merger announcement. Further analyses suggest that acquirers’ extent of earnings management is an increasing function of their economic benefit at stake, and a decreasing function of monitoring by banks and foreign investors.     

Does Fintech facilitate cross-border M&As? Evidence from Chinese A-share listed firms

This paper examines whether and how financial technology (Fintech) affects the cross-border M&A decision-making and the performance of acquiring firms. Using a sample of Chinese A-share listed firms over the period of 2011–2019, we find that local Fintech development effectively facilitates firms' cross-border M&A activities. This effect is more prominent for firms with lower innovation capability, with higher profitability, and those in key participant provinces of the Belt and Road Initiative. We provide evidence that Fintech supports the decision-making of cross-border M&As due to the mitigation of financing friction and the decrease in information disadvantage. Further analysis also shows that the acquirer's cross-border M&A performance is higher when it is located in a province with better development of Fintech. Our paper provides new insights into the impact of technology-enabled innovation in the financial industry on the behavior of firms in non-financial industries.     

Do firms have leverage targets? Evidence from acquisitions

In the context of large acquisitions, we provide evidence on whether firms have target capital structures. We examine how deviations from these targets affect how bidders choose to finance acquisitions and how they adjust their capital structure following the acquisitions. We show that when a bidder's leverage is over its target level, it is less likely to finance the acquisition with debt and more likely to finance the acquisition with equity. Also, we find a positive association between the merger-induced changes in target and actual leverage, and we show that bidders incorporate more than two-thirds of the change to the merged firm's new target leverage. Following debt-financed acquisitions, managers actively move the firm back to its target leverage, reversing more than 75% of the acquisition's leverage effect within five years. Overall, our results are consistent with a model of capital structure that includes a target level and adjustment costs.     

What firm risk factors drive bank loan pricing and other terms? Evidence from China

This study investigates how firm risk factors affect bank loan pricing. Although firm-specific stock price crash risk affects bank loan costs directly, it also prompts other risks, including financial restatement and litigation, which in turn trigger higher bank loan costs. Strong internal and external governance mechanisms help reduce agency problems and improve information transparency, alleviating the adverse effect of stock price crash risk on loan costs. Our results confirm that bankers take good corporate governance into account in their bank loan decisions. We also show that bond investors price the adverse effect of stock price crash risk, prompting higher corporate bond costs. Futher evidence suggests that banks impose stricter non-price terms, such as smaller loan size, shorter loan maturity, and a higher likelihood of collateral requirement, on firms with higher crash risk.     

How do insured deposits affect bank risk? Evidence from the 2008 Emergency Economic Stabilization Act

This paper tests whether an increase in insured deposits causes banks to become more risky. We use variation introduced by the U.S. Emergency Economic Stabilization Act in October 2008, which increased the deposit insurance coverage from $100,000 to $250,000 per depositor and bank. For some banks, the amount of insured deposits increased significantly; for others, it was a minor change. Our analysis shows that the more affected banks increase their investments in risky commercial real estate loans and become more risky relative to unaffected banks following the change. This effect is most distinct for affected banks that are low capitalized.     

Bank M&A: A market power story?

This paper analyzes capital market reactions to international bank M&A. We investigate the combined stock return patterns of targets, bidders, and their peers upon takeover announcement, and closing or withdrawal. We distinguish five common M&A hypotheses and relate characteristic and mutually exclusive abnormal stock return patterns to each hypothesis. The findings show that there are more investors who believe in gains through the exploitation of market power by the post-merger entity than investors who believe in any of the other motives tested in the paper. In a multinomial logistic model we show that patterns related to market power significantly concur with large relative target size, intra-industry mergers, and increasing market concentration, suggesting a substantial lessening of competition through M&A.     

Does political pressure matter in bank lending? Evidence from China

Using provincial data from China between 2002 and 2011, we find substantial evidence indicating a positive association between the growth of bank loans issued by commercial banks and the political pressures faced by provincial leaders. This association is particularly true for state‐owned banks, which are much more politically pressurized than others, but is relatively attenuated in provinces with a more developed banking sector. We also find that bank loans issued under greater political pressures are less commercially oriented and have lower quality. Our findings are robust to a variety of sensitivity analyses and alternative measures of political pressure. Overall, our study contribute to a growing literature emphasizing the role of the political incentives of government officials in fuelling economic growth through credit allocation.     

What do insiders know? Evidence from insider trading around share repurchases and SEOs

We examine the nature of information contained in insider trades prior to corporate events. Insiders' net buying increases before open market share repurchase announcements and decreases before seasoned equity offers. Higher insider net buying is associated with better post-event operating performance, a reduction in undervaluation, and, for repurchases, lower post-event cost of capital. Insider trading also predicts announcement returns and long-term abnormal returns following events. Overall, our results suggest that insider trades before corporate events contain information about changes both in fundamentals and in investor sentiment.     

Does bank ownership affect lending behavior? Evidence from the Euro area

We analyze the differences in lending policies across banks characterized by different types of ownership, using micro-level data on Euro area banks during the period 1999–2011 to detect possible variations in bank lending supply responses to changes in monetary policy. Our results identify a general difference between stakeholder and shareholder banks: following a monetary policy contraction, stakeholder banks decrease their loan supply to a lesser extent than shareholder banks. A detailed analysis of the effect among stakeholder banks reveals that cooperative banks continued to smooth the impact of tighter monetary policy on their lending during the crisis period (2008–2011), whereas savings banks did not. Stakeholder banks’ propensity to smooth their lending cycles suggests that their presence in the economy has the potential to reduce credit supply volatility.     

Do non-traditional banking activities reduce bank liquidity creation? Evidence from Vietnam

The study analyzes the impact of engaging in non-traditional banking activities on bank liquidity creation. This strand of research has almost gone unnoticed by academics so far. Based on a dataset of Vietnamese commercial banks from 2007 to 2018, we document that the liquidity creation function of banks decreases with the income from non-traditional banking segments. This impact is observed in both on- and off-balance sheets across multiple robustness tests of the static and dynamic panels regressed by the ordinary least squares method and the generalized method of moments. Further decomposing the non-interest income sources, we find that banks that engage more in non-traditional activities for fees and commissions tend to reduce the liquidity creation more compared to other counterparts. The findings offer insightful implications for regulatory agencies and bank managers in the determination of liquidity creation behavior in emerging markets.     

Which bank is the “central” bank?

Liquidity flows through a financial network cannot be accurately described using external processing constraints alone. Behavioral aspects of participants also matter. A method similar to Google's PageRank procedure is used to produce a ranking of participants in the Canadian Large Value Transfer System in terms of their daily liquidity holdings. Accounting for differences in banks’ processing speeds is essential for explaining why observed distributions of liquidity differ from the initial distributions, which are determined by the credit limits selected by banks. Delay tendencies of banks are unobservable in the data and are estimated using a Markov model.     

What Do Consumers’ Fund Flows Maximize? Evidence from Their Brokers’ Incentives

We ask whether mutual funds’ flows reflect the incentives of the brokers intermediating them. The incentives we address are those revealed in statutory filings: the brokers’ shares of sales loads and other revenue, and their affiliation with the fund family. We find significant effects of these payments to brokers on funds’ inflows, particularly when the brokers are not affiliated. Tracking these investments forward, we find load sharing, but not revenue sharing, to predict poor performance, consistent with the different incentives these payments impart. We identify one benefit of captive brokerage, which is the recapture of redemptions elsewhere in the family.     

What determines the composition of banks’ loan portfolios? Evidence from transition countries

This paper explores how bank characteristics and the institutional environment influence the composition of banks’ loan portfolios. We use a new and unique data set based on the EBRD Banking Environment and Performance Survey (BEPS), which was conducted for 220 banks in 20 transition countries. We show that bank ownership, bank size, and legal creditor protection are important determinants of the composition of banks’ loan portfolios. In particular, we find that foreign banks play an active role in mortgage lending. Moreover, banks that perceive pledge and mortgage laws to be of high quality choose to focus more on mortgage lending.