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Capital Adequacy, Bank Mergers, and the Medium of Payment

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  • Gustavo Grullon

    (Johnson School of Management, Cornell University,)

  • Roni Michaely
  • Itzhak Swary

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.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal Journal of Business Finance & Accounting.

Volume (Year): 24 (1997-01)
Issue (Month): 1 ()
Pages: 97-124

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Handle: RePEc:bla:jbfnac:v:24:y:1997-01:i:1:p:97-124

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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X

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Cited by:
  1. Díaz Díaz, Belén & Sanfilippo Azofra, Sergio & López Gutiérrez, Carlos, 2013. "Synergies or overpayment in European corporate M&A," MPRA Paper 51070, University Library of Munich, Germany.
  2. Ismail, Ahmad & Krause, Andreas, 2010. "Determinants of the method of payment in mergers and acquisitions," The Quarterly Review of Economics and Finance, Elsevier, vol. 50(4), pages 471-484, November.

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