Capital Adequacy, Bank Mergers, and the Medium of Payment

Abstract

We examine how banks' capital requirements affect the way bank mergers are financed, as well as the stock-market reaction to the merger announcement. We find that the capital position of the acquirer is one of the two factors most strongly influencing the choice of financing method; the other is the relative size of the merging banks. The smaller the acquirer in relation to the target bank and the higher the acquirer's capital adequacy ratio, the more likely it is that the acquisition will be financed by a stock swap. The capital requirements also affect the market reaction, through their effect on the financing method choice. The value of the acquirer's equity decreases more at the time of the merger announcement if the method of payment is stock. Like prior studies, we find that the abnormal return on the target banks' stock is positive. Copyright Blackwell Publishers Ltd 1997.

Bank Mergers and Insider Nontrading

“…Akhigbe and Madura (1999) found that target bank shares increase about 14%, on average, in the 12 days leading to and including the announcement date. Grullon, Michaely, and Swary (1997), Houston and Ryngaert (1994), and Cornett and De (1991) also found that target bank shares experience a substantial increase in value around acquisition announcements.…”

“…In a pure cash transaction, Stock Swap takes a value of zero. Grullon, Michaely, and Swary (1997) found that the method of payment in bank acquisitions has no influence on the target bank shareholders' merger announcement returns. However, even if premiums paid to target bank shareholders are the same for cash transactions and stock swap transactions, target bank insiders could, on average, experience greater wealth increases in stock swap transactions.…”

“…Consistent with our expectations, we find evidence that Bank Size is positively related to abnormal insider selling. Using 14 Using their sample of bank acquisitions, Grullon, Michaely, and Swary (1997) also found that the probability of a stock swap is influenced by many factors. Because Stock Swap could be correlated with many other variables, we cannot be certain that an observed relation between Stock Swap and insider trading is due to the tax benefit of stock-financed acquisitions.…”

“…Our evidence is also consistent with bank insiders ceasing to trade to avoid the perception of impropriety. We are grateful to an anonymous reviewer for suggesting this alternative explanation.6 For discussions concerning the factors that motivated recent bank mergers and evidence on the performance changes around bank mergers; seeGrullon, Michaely, and Swary (1997),Peristiani (1997),Moore (1996),Pilloff (1996),and Benston, Hunter, and Wall (1995).…”

Financial advisors, financial crisis, and shareholder wealth in bank mergers

“…find that target announcement returns are positively associated with the capital ratio. Baradwaj et al (1991) and Grullon et al (1997) similarly find that bidder cumulative abnormal returns are positively related to the capital ratio. However, Cornett et al (2003) report a negative relationship between bidder cumulative abnormal returns and the capital ratio.…”