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The impact of European bank mergers on bidder default risk

  • Vallascas, Francesco
  • Hagendorff, Jens

We analyze the implications of European bank consolidation on the default risk of acquiring banks. For a sample of 134 bidding banks, we employ the Merton distance to default model to show that, on average, bank mergers are risk neutral. However, for relatively safe banks, mergers generate a significant increase in default risk. This result is particularly pronounced for cross-border and activity-diversifying deals as well as for deals completed under weak bank regulatory regimes. Also, large deals, which pose organizational and procedural hurdles, experience a merger-related increase in default risk. Our results cast doubt on the ability of bank merger activity to exert a risk-reducing and stabilizing effect on the European banking industry.

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 35 (2011)
Issue (Month): 4 (April)
Pages: 902-915

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Handle: RePEc:eee:jbfina:v:35:y:2011:i:4:p:902-915
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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