Abstract
This study examines structural shifts in the market for bank control resulting from the court decision of Northeast Bancorp, Inc., et al. v. Board of Governors (1985), and analyze its impact on stock prices and risk incentives in affected banks. The outcome of the case reaffirmed the constitutionality of regional compacts in interstate banking laws, which were motivated by protectionist policies. We document large, positive reactions in the affected bank stock prices, and show that it is mostly due to takeover speculation on expected targets. These price reactions negatively impact subsequent risk-taking. We find consistent evidence using disaggregated data on risky lending behavior within border counties with different regulatory environments.
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