The role of bank advisors in mergers and acquisitions
This paper looks at the role of both commercial and investment banks in providing merger advisory services. In this area, unlike some areas of investment banking, commercial banks have always been allowed to compete directly with investment banks. In their dual role as lenders and advisors to firms that are the target or the acquirer in a merger, banks can be viewed as serving a certification function. However, banks acting as both lenders and advisors face a potential conflict of interest that may mitigate or offset any certification effect. Overall, we find evidence supporting the ...
Impact of independent directors and the regulatory environment on bank merger prices: evidence from takeover activity in the 1990s
This article examines the primary motivation of the bank merger waves in the 1990s. Our investigation of the factors that determine bid premiums paid for target banks focuses on the importance of the financial characteristics of the targets, composition of their boards of directors, and the regulatory environment. ; The value of the target bank to the acquiring bank should reflect its present discounted value of future net cash flows. Thus, at a minimum, the bid price should be a combination of the stand-alone value of the net assets of the target bank and the net cash flows from ...
How much would banks be willing to pay to become \\"too-big-to-fail\\" and to capture other benefits?
This paper examines an important aspect of the ?too-big-to-fail? (TBTF) policy employed by regulatory agencies in the United States. How much is it worth to become TBTF? How much has the TBTF status added to bank shareholders? wealth? Using market and accounting data during the merger boom (1991-2004) when larger banks greatly expanded their size through mergers and acquisitions, we find that banking organizations are willing to pay an added premium for mergers that will put them over the asset sizes that are commonly viewed as the thresholds for being TBTF. We estimate at least $14 billion ...
Understanding the effects of the merger boom on community banks
The merger boom in the U.S. banking industry has caused the number of banking organizations in the nation to fall by nearly a third since 1990. Most of this contraction has involved small community banks. ; A common perception is that most of these small banks are being absorbed by large banks. The disappearance of small banks is raising concerns in many communities because small banks are often a major source of personal services and relationship lending to local businesses and depositors. ; Jagtiani investigates the merger boom in detail and suggests that the merger boom actually has the ...
The potential role of subordinated debt programs in enhancing market discipline in banking
Previous studies have found that subordinated debt (sub-debt) markets do differentiate between banks with different risk profiles. This finding satisfies a necessary condition for regulatory proposals which would mandate increased reliance on sub-debt in the bank capital structure to discipline banks? risk taking. Such proposals, however, have not been implemented, partially because there are still concerns about the quality of the signal generated in current debt markets. We argue that previous studies evaluating the potential usefulness of sub-debt proposals have evaluated spreads in an ...
Target's corporate governance and bank merger payoffs
Commercial bank merger and acquisition (M&A) transactions are especially informative for analyzing the impact of differing corporate governance structures on the balance of corporate control between managers and shareholders. We exploit these special characteristics to investigate the balance of control between top-tier managers and shareholders using data from bank M&A transactions over the period 1990-2004. Unlike research on non-financial firms, the impacts of independent directors, managerial share ownership, and independent blockholders on bank merger purchase premiums in this ...
Early warning models for bank supervision: Simpler could be better.
Can computer-based models, using publicly available information, be used as off-site early warning systems (EWS) to identify banks that will become inadequately capitalized in the near future? The EWS models analyzed in this article are able to detect the early onset of financial distress one year in advance with a reasonable degree of accuracy. Although simple EWS models do as well as or better than more sophisticated ones, more sophisticated models could provide detailed information about individual bank strengths and weaknesses.
Do markets react to regulatory information?