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Target's corporate governance and bank merger payoffs

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  • Elijah Brewer
  • William E. Jackson
  • Julapa Jagtiani

Abstract

Commercial bank merger and acquisition (M&A) transactions are especially informative for analyzing the impact of differing corporate governance structures on the balance of corporate control between managers and shareholders. We exploit these special characteristics to investigate the balance of control between top-tier managers and shareholders using data from bank M&A transactions over the period 1990-2004. Unlike research on non-financial firms, the impacts of independent directors, managerial share ownership, and independent blockholders on bank merger purchase premiums in this environment are likely to be measured more consistently because of industry operating standards and regulations. It is also the case that research on banks in this area has not received adequate attention. Our model controls for risk characteristics of the target and the acquiring banks, the deal characteristics, and the economic environment. The results are robust. Our results are consistent with those found for non-financial firms, and are consistent with the hypothesis that independent directors could provide an important internal governance mechanism for protecting shareholders’ interests especially in large scale transactions such as mergers and takeovers. We also find results consistent with the conflict of interest argument, where top-tier managers tend to trade potential takeover gains in return for their own personal benefits, such as job security and other employment related perquisites. Our overall findings would support policies that promote independent outside directors on the board of commercial banking firms in order to provide protection for shareholders and investors at large.

Suggested Citation

  • Elijah Brewer & William E. Jackson & Julapa Jagtiani, 2007. "Target's corporate governance and bank merger payoffs," Research Working Paper RWP 07-13, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp07-13
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    References listed on IDEAS

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    13. 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 777-788, August.
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    Cited by:

    1. Hagendorff, Jens & Hernando, Ignacio & Nieto, Maria J. & Wall, Larry D., 2012. "What do premiums paid for bank M&As reflect? The case of the European Union," Journal of Banking & Finance, Elsevier, vol. 36(3), pages 749-759.
    2. Elijah Brewer, 2009. "Comments on Cross-border Bank Acquisitions: Is there a Performance Effect?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 36(2), pages 199-202, December.
    3. Molyneux, Philip & Schaeck, Klaus & Zhou, Tim Mi, 2014. "‘Too systemically important to fail’ in banking – Evidence from bank mergers and acquisitions," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 258-282.

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    Keywords

    Bank mergers ; Corporate governance ; Bank holding companies;

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