Changes in Interstate Banking Laws: The Impact on Shareholder Wealth

Abstract

This study examines the impact on shareholder wealth of changes in interstate banking laws. The research demonstrates that changes in state statutes which allow interstate banking have a positive impact on the stock prices of regional banking organizations and a negative impact on the stock prices of money center banks. Interstate banking statutes initially exclude those states in which the money center banks are headquartered. The findings provide evidence that, by excluding money center banks from expansion across state lines, the competition from the regional banks may have an adverse competitive effect on the money center banks. FROM JUNE 1982 TO SEPTEMBER 1986, 44 states and the District of Columbia passed some form of interstate banking legislation. This study measures the impact of these legislative changes on the wealth of bank shareholders. When legislation is enacted, each state's banks are given the opportunity to engage in interstate merger activity. The market's perception of the impact on the affected banks should be reflected in the equity returns of shareholders. The results show that, while there are no announcement effects for the entire sample, there are significant effects among a subsample of the data set. Money center banks experience negative returns throughout the sample period, whereas regional banking organizations experience positive abnormal returns. Section I reviews the literature. Section II describes the data used in this study and defines the event. The methodological issues are addressed in Section III. The empirical results are in Section IV. The conclusions are in Section V.