The Impact Of Merger Legislation On Bank Mergers
Bocconi University – Department of Finance; European University Institute – Robert Schuman Centre for Advanced Studies (RSCAS)
University of Zurich – Department of Banking and Finance; Swiss Finance Institute
Federal Reserve Banks – Federal Reserve Bank of Cleveland
June 1, 2016
We find that stricter merger control legislation increases abnormal announcement returns of targets in bank mergers by 7 percentage points. Analyzing potential explanations for this result, we document an increase in the pre-merger profitability of targets, a decrease in the size of acquirers, and a decreasing share of transactions in which banks are acquired by other banks. Other merger properties, including the size and risk profile of targets, the geographic overlap of merging banks, and the stock market response of rivals appear unaffected. The evidence suggests that the strengthening of merger control leads to more efficient and more competitive transactions.
The Impact Of Merger Legislation On Bank Mergers – Introduction
The banking sector has long been regarded as “special” in various ways. First, it is one of the most regulated sectors in the economy for reasons linked to systemic risk and consumer protection. Second, due to the strong focus on financial stability, the sector has long been exempted from any other objective or policy that may interfere with this. In particular, considerations concerning the degree of competition or the level of concentration in the sector have been historically downplayed in many countries precisely because of the fear that competition could be detrimental for financial stability.
Only more recently, thanks also to the process of liberalization started in the 1970s-1980s and to findings showing a beneficial link between competition and stability, the attention paid to competition considerations in banking has increased and the sector has been gradually subject to the introduction or the strengthening of competition policy in numerous countries. Despite this, special provisions in the application of competition policy to the banking sector remain pervasive and the (scarce) available research on the implementation of competition laws in practice suggests that competition concerns frequently have been overridden.
Against this background, our study contributes to the debate on competition and stability in banking by empirically studying the impact of the introduction of merger control on the valuation and other characteristics of bank mergers and acquisitions. In particular, we analyze a dataset of announced bank mergers and acquisitions between 1986 and 2007 in 15 European countries that experienced changes in merger control legislation. We construct a comparison between transactions before and after the change in legislation, and measure differences in the characteristics of the transactions as well as of the merging parties.
Our main finding is a statistically significant and economically meaningful increase by 7 percentage points in the market premium that target stocks experience around the announcement of a merger. Analyzing the reasons behind this result, we find that after the introduction of merger control the average and relative size of the acquirer banks fell significantly, while the share of bank acquisitions by non-banks increased. Other characteristics we study, including the profitability and risk-profile of targets as well as the market response of rival banks, appear unaffected. We interpret this evidence as suggestive of an effective implementation of merger control in banking, leading to more efficient and more competitive transactions.
Our paper is linked to a number of strands of literature. Our results contribute to the literature on the effects of merger control on the market for corporate control starting with the contributions by Eckbo (1985), Eckbo andWier (1985) and Eckbo (1992). While these papers find a limited impact of merger control in terms of preventing or deterring anti-competitive mergers, more recent results in Aktas et al. (2004), Seldeslachts et al. (2009) and Duso et al. (2011) suggest that enforcement decisions on proposed mergers tend to have a positive deterrence effect on future transactions. In line with these, we also find that transactions among banks become more efficient and more competitive after merger control is introduced, suggesting a positive and significant effect of the legislative change.
A closer contribution to ours in this literature is Duso et al. (2013), who study the reform of the EU merger regulation in 2004. They find an improvement in the predictability of enforcement decisions by the European Commission. The reform also increased the effectiveness of decisions in preventing anti-competitive mergers, but only marginally so, in particular with respect to decisions involving remedies. Although we also analyze the effectiveness of new merger regulation, our study differs from this paper in two important respects. First, while Duso et al. (2013) focus only on one legislative change, we consider a set of changes in the merger legislations across 15 different countries occurring in the period 1989 to 2007. This allows us to study events both across time and countries. Second, while their dataset includes only mergers that were notified to the European Commission, we study a dataset of merger activity that also includes transactions that never reached the relevant competition authority. Thus, our paper provides a different and complementary perspective on the effects of legislative changes on merger activity.
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