THE EFFECT OF MERGERS AND ACQUISITIONS ON BANK RISK-TAKING

Abstract

This paper evaluates how the risks associated with mergers and acquisitions (M&As) affect Bank Holding Companies’ (BHCs) levels of insolvency risk. Bank insolvency is hypothesized to be affected by M&As directly and indirectly through banks’ market risk, geographical diversification, and activity diversification. The relationship between bank insolvency, diversification, and market risk is estimated as a system using the Generalized Method of Moments (GMM). The key finding is that M&As erode banks’ insolvency, both directly and indirectly through the effects associated with their geographical diversification.