Abstract
We use data from the past 30 years of takeover activity in the U.S. banking industry to test competing neoclassical and misvaluation merger theories. Test results are consistent with evidence in the literature that merger activity is significantly related to both structural industry change and stock price misvaluation. Our primary contribution is to show that changes in misvaluation reflect a rise in industry-wide risk taking and that increases in risk originate from changes in industry structure due to deregulation. A measure of bank risk taking subsumes the power of stock price misvaluation to explain subsequent merger activity.
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