Advanced Search
MyIDEAS: Login to save this paper or follow this series

Impact of independent directors and the regulatory environment on bank merger prices: evidence from takeover activity in the 1990s

Contents:

Author Info

  • Elijah Brewer, III
  • William E. Jackson, III
  • Julapa A. Jagtiana

Abstract

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 higher-valued deposit insurance as a result of the proposed merger. Finance literature also suggests that in large transactions, such as mergers and acquisitions, the value of independent outside directors can be very important as internal governance mechanisms for protecting the interest of shareholders and help to mitigate shareholder/management agency problems. In addition, regulation could also play an important role in determining the number and type of bank merger transactions. Prior to the Riegle-Neal Act banks were restricted by federal and state laws from expanding across state lines. We examine whether bank merger prices were higher or lower as a result of these restrictions. We find a variety of interesting and important results. We find that higher performing targets, as measured by return on assets, are offered higher bid premiums. We also find that lower risk targets, as well as those that may provide some diversification benefits, are offered higher prices.> We find that changes in the regulatory environment had a significant impact on bank merger activities in general, and bank merger prices in particular. For example, merger bid premiums increased by approximately 35 percent on average from the pre- to the post-Riegle-Neal periods. Finally, consistent with the literature on non-financial firms, our results provide strong support for the proposition that during takeovers independent boards act to increase the wealth of the shareholders of target banks.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/2000/wp2000_31.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-00-31.

as in new window
Length:
Date of creation: 2000
Date of revision:
Handle: RePEc:fip:fedhwp:wp-00-31

Contact details of provider:
Postal: P.O. Box 834, 230 South LaSalle Street, Chicago, Illinois 60690-0834
Phone: 312/322-5111
Fax: 312/322-5515
Email:
Web page: http://www.chicagofed.org/
More information through EDIRC

Order Information:
Email:
Web: http://www.chicagofed.org/webpages/publications/print_publication_order_form.cfm

Related research

Keywords: Bank mergers ; Prices;

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. William C. Hunter & Larry D. Wall, 1989. "Bank merger motivations: a review of the evidence and an examination of key target bank characteristics," Economic Review, Federal Reserve Bank of Atlanta, issue Sep, pages 2-19.
  2. Benston, George J & Hunter, William C & Wall, Larry D, 1995. "Motivations for Bank Mergers and Acquisitions: Enhancing the Deposit Insurance Put Option versus Earnings Diversification," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(3), pages 777-88, August.
  3. Cotter, James F. & Shivdasani, Anil & Zenner, Marc, 1997. "Do independent directors enhance target shareholder wealth during tender offers?," Journal of Financial Economics, Elsevier, vol. 43(2), pages 195-218, February.
  4. Donald T. Savage, 1993. "Interstate banking: a status report," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), issue Dec, pages 1075-1089.
  5. Brickley, James A & James, Christopher M, 1987. "The Takeover Market, Corporate Board Composition, and Ownership Structure: The Case of Banking," Journal of Law and Economics, University of Chicago Press, vol. 30(1), pages 161-80, April.
  6. Cornett, Marcia Millon & Tehranian, Hassan, 1992. "Changes in corporate performance associated with bank acquisitions," Journal of Financial Economics, Elsevier, vol. 31(2), pages 211-234, April.
  7. Alien, Linda & Cebenoyan, A. Sinan, 1991. "Bank acquisitions and ownership structure: Theory and evidence," Journal of Banking & Finance, Elsevier, vol. 15(2), pages 425-448, April.
  8. Cheng, David C & Gup, Benton E & Wall, Larry D, 1989. "Financial Determinants of Bank Takeovers: A Note," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 21(4), pages 524-36, November.
  9. Sushka, Marie E. & Bendeck, Yvette, 1988. "Bank acquisition and stockholders' wealth," Journal of Banking & Finance, Elsevier, vol. 12(4), pages 551-562, December.
  10. Allen N. Berger & Robert DeYoung & Hesna Genay & Gregory F. Udell, 1999. "Globalization of financial institutions: evidence from cross-border banking performance," Working Paper Series WP-99-25, Federal Reserve Bank of Chicago.
  11. Brickley, James A. & Coles, Jeffrey L. & Terry, Rory L., 1994. "Outside directors and the adoption of poison pills," Journal of Financial Economics, Elsevier, vol. 35(3), pages 371-390, June.
  12. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
  13. Travlos, Nickolaos G, 1987. " Corporate Takeover Bids, Methods of Payment, and Bidding Firms' Stock Returns," Journal of Finance, American Finance Association, vol. 42(4), pages 943-63, September.
  14. Palia, Darius, 1993. "The Managerial, Regulatory, and Financial Determinants of Bank Merger Premiums," Journal of Industrial Economics, Wiley Blackwell, vol. 41(1), pages 91-102, March.
  15. Millon Cornett, Marcia & De, Sankar, 1991. "Common stock returns in corporate takeover bids: Evidence from interstate bank mergers," Journal of Banking & Finance, Elsevier, vol. 15(2), pages 273-295, April.
  16. Byrd, John W. & Hickman, Kent A., 1992. "Do outside directors monitor managers? *1: Evidence from tender offer bids," Journal of Financial Economics, Elsevier, vol. 32(2), pages 195-221, October.
  17. Baradwaj, Babu G. & Fraser, Donald R. & Furtado, Eugene P. H., 1990. "Hostile bank takeover offers : Analysis and implications," Journal of Banking & Finance, Elsevier, vol. 14(6), pages 1229-1242, December.
  18. John H. Boyd & Stanley L. Graham, 1991. "Investigating the banking consolidation trend," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr, pages 3-15.
  19. Vijaya Subrahmanyam & Nanda Rangan & Stuart Rosenstein, 1997. "The Role of Outside Directors in Bank Aquisitions," Financial Management, Financial Management Association, vol. 26(3), Fall.
  20. Larry A. Frieder, 1988. "The Interstate Banking Landscape: Legislative Policies And Rationale," Contemporary Economic Policy, Western Economic Association International, vol. 6(2), pages 41-66, 04.
  21. Rosenstein, Stuart & Wyatt, Jeffrey G., 1997. "Inside directors, board effectiveness, and shareholder wealth," Journal of Financial Economics, Elsevier, vol. 44(2), pages 229-250, May.
  22. Dubofsky, David A. & Fraser, Donald R., 1989. "The differential impact of two significant court decisions concerning banking consolidation," Journal of Banking & Finance, Elsevier, vol. 13(3), pages 339-354, July.
  23. Robert DeYoung, 1999. "Merger and the changing landscape of commercial banking (Part I)," Chicago Fed Letter, Federal Reserve Bank of Chicago, issue Sep.
  24. Eckbo, B. Espen & Langohr, Herwig, 1989. "Information disclosure, method of payment, and takeover premiums : Public and private tender offers in France," Journal of Financial Economics, Elsevier, vol. 24(2), pages 363-403.
  25. Fama, Eugene F, 1980. "Agency Problems and the Theory of the Firm," Journal of Political Economy, University of Chicago Press, vol. 88(2), pages 288-307, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Jens Hagendorff & Ignacio Hernando & María J. Nieto & Larry D. Wall, 2010. "What do premiums paid for bank M&As reflect? The case of the European Union," Banco de Espa�a Working Papers 1011, Banco de Espa�a.
  2. Linn, Scott C. & Park, Daniel, 2005. "Outside director compensation policy and the investment opportunity set," Journal of Corporate Finance, Elsevier, vol. 11(4), pages 680-715, September.
  3. Renée B. Adams & Hamid Mehran, 2008. "Corporate performance, board structure, and their determinants in the banking industry," Staff Reports 330, Federal Reserve Bank of New York.
  4. Elijah Brewer, III & William E. Jackson, III & Larry D. Wall, 2006. "When target CEOs contract with acquirers: evidence from bank mergers and acquisitions," Working Paper 2006-28, Federal Reserve Bank of Atlanta.
  5. Fotios Pasiouras & Chrysovalantis Gaganis & Constantin Zopounidis, 2008. "Regulations, Supervision Approaches and Acquisition Likelihood in the Asian Banking Industry," Asia-Pacific Financial Markets, Springer, vol. 15(2), pages 135-154, June.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedhwp:wp-00-31. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernie Flores).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.