Financial Institution Mergers Research Articles

Credit Risk Under Common Ownership: The Benefit and Threat of Powerful Shareholders

Existing studies show that common institutional ownership of multiple industry firms improves governance over management, because such common owners possess industry-wide information advantage and governance expertise. This paper studies whether creditors perceive common owners as allied monitors or potential powerful expropriators. I find that creditors impose less restrictive covenants on loans to firms with higher common ownership. A quasi-natural experiment using financial institution mergers suggests that the relationship is likely to be causal. This effect of common ownership is mainly pronounced in firms with more financial risk, weaker shareholder governance, and lower creditor bargaining power. Overall, these findings indicate that creditors benefit from better governance by common owners, and therefore exert less monitoring effort in firms with higher common ownership.

The Effect of Institutional Ownership Types on Innovation and Competition

In corporate innovation, the type of institutional ownership matters. Using exogenous shocks from mergers of financial institutions, we identify two countervailing effects of common ownership on corporate innovation. Higher common ownership by focused, long-term dedicated institutional investors promotes innovation output and impact, as measured by number of patents and non-self citations. Meanwhile, higher common ownership by diversified, short-term transient investors discourages these. Moreover, the effects of common ownership by diversified, long-term quasi-indexing institutions on innovation vary with industry competitiveness. Evidence suggests that common ownership affects innovation through the channels of firm valuation and financing constraint. These results contribute to an ongoing debate on the effects of common institutional ownership on competition.

Two Tales of Monitoring: Effects of Institutional Cross-Blockholding on Accruals

Over 70% of publicly traded U.S. firms are interconnected through institutional investors’ cross-blockholding. We study the implications of such emerging ownership patterns for financial reporting, and document a robust, negative association between accruals and institutional cross-blockholding. We demonstrate causal inference using financial institution mergers as exogenous shocks to cross-blockholding. Results from additional analyses support both the product market monitoring and the financial reporting monitoring hypotheses. Finally, we show that the increase in institutional cross-blockholding strengthens the association between accruals and cash flows over the past 35 years.

Simultaneous Debt-Equity Holdings and The Resolution of Financial Distress

Constructing a comprehensive data set of financially distressed firms that restructured their debts from 2000-2014, we find that firms with financial institutions’ debt-equity simultaneous holdings are more likely to restructure out of court than to file for bankruptcy. The effect is stronger when loans are over-secured and when the expected bankruptcy costs are larger. We use mergers of financial institutions and instrumental variable estimations to establish causality. Firms with simultaneous holdings experience higher stock returns and are not more likely to reenter into financial distress. The evidence suggests that the mitigation of shareholder-creditor conflicts results in cost-effective resolutions of financial distress.

Disclosure Incentives When Competing Firms Have Common Ownership

This paper examines whether common ownership – i.e., instances where investors simultaneously own significant stakes in competing firms – affects voluntary disclosure. We argue that common ownership (i) reduces proprietary cost concerns of disclosure, and (ii) incentivizes firms to “internalize” the externality benefits of their disclosure for co-owned peer firms. Accordingly, we find a positive relation between common ownership and disclosure. Evidence from cross-sectional tests and a quasi-natural experiment based on financial institution mergers help mitigate concerns that our results are explained by an omitted variable bias or reverse causality. Finally, we find that common ownership is associated with increased market liquidity.

Product Market Competition in a World of Cross-Ownership: Evidence from Institutional Blockholdings

We analyze the effects of institutional cross-ownership of same-industry firms on product market performance and behavior. Our results show that cross-held firms experience significantly higher market share growth than do non-cross-held firms. We establish causality by relying on a difference-in-differences approach based on the quasi-natural experiment of financial institution mergers. We also find evidence suggesting that institutional cross-ownership facilitates explicit forms of product market collaboration (such as within-industry joint ventures, strategic alliances, or within-industry acquisitions) and improves innovation productivity and operating profitability. Overall, our evidence indicates that cross-ownership by institutional blockholders offers strategic benefits by fostering product market coordination.Received November 12, 2015; editorial decision December 31, 2016 by Editor Itay Goldstein.

Institutional Dual Holdings and Risk Shifting: Evidence from Corporate Innovation

This paper analyzes the impact of shareholder-creditor conflicts on corporate risk-taking. In particular, I examine the role played by institutional dual-holders (i.e., those simultaneously holding a same firm's debt and equity) in corporate innovation. Baseline results show that firms held by dual-holders generate fewer but more valuable patents. To establish causality, I use a difference-in-differences approach based on the quasi-natural experiment of financial institution mergers. The evidence is consistent with the hypothesis that institutional dual-holders can mitigate shareholder-creditor conflicts and thus curb excessive risk-taking. I further find that the decreased sensitivity of managerial compensation to firm risk might be one possible channel through which dual-holders affect risk shifting. Overall, the paper offers new evidence that shareholder-creditor conflicts indeed exist and lead to risk shifting (asset substitution), and that institutional dual ownership can partially mitigate this problem.

Editors’ Introduction—Special Issue on Mergers and Acquisitions of Financial Institutions

This special issue of the Journal of Financial Services Research features presentations from a conference on “Mergers and Acquisitions of Financial Institutions.” The conference was held on November 30 and December 1, 2007 at the Federal Deposit Insurance Corporation’s Seidman Center in Arlington, Virginia. Funding, facilities, and other resources for the conference were made available by the four co-sponsoring organizations: the FDIC, the Federal Reserve Bank of Chicago, the JFSR, and the University of Kansas School of Business. One of the most salient features of the U.S. and European economies during the past two decades has been the changing structure of financial intermediaries. Banks and other financial firms have exploited the opportunities made available by industry deregulation and technological innovation by engaging in thousands of mergers and acquisitions, and these combinations have dramatically increased the size, scope, and reach of these institutions. The articles in this special issue analyze the financial performance of these combinations, as well as their impact on market prices and market structure. M&A activity tends to wax and wane over time, and we may currently stand at the cusp of a new wave of financial institution mergers. As financial markets recover from the recent economic crisis, M&As are likely to play an important role in the rationalization, restructuring and re-regulation of the financial services industry. We hope that the research published here will help inform both business and government policymakers as this new industry restructuring plays out.

Mergers and Acquisitions of Financial Institutions: A Review of the Post-2000 Literature

This paper provides a review of the recent financial institution mergers and acquisition (M&A) literature covering over 150 studies. Several robust themes emerge in the post-2000 literature. North American bank mergers are (or can be) efficiency improving, although the event-study literature presents a mixed picture regarding stockholder wealth creation. In contrast, European bank mergers appear to have resulted in both efficiency gains and stockholder value enhancement. There is robust evidence linking high CEO compensation to merger activity and strong implications that deals can be motivated by the desire to obtain ‘too-big-to-fail’ status and reap the associated subsidies. Evidence on the impact of both geographic and product diversification via merger is mixed. There is growing evidence that financial institution M&As can adversely impact certain types of borrowers, depositors, and other external stakeholders.

Cross-border acquisitions of US financial institutions: Impact of macroeconomic factors

This study investigates the impact of mergers and acquisitions on US bidders and targets involved in cross-border mergers of financial institutions. The findings indicate that while US targets experience positive significant wealth gains, US bidders encounter insignificant wealth gains during the merger announcements. There are also differences in wealth gains with respect to industry classification and to the regional location of foreign targets and bidders. The macroeconomic variables, including foreign and US economic conditions, level of economic development of target country, exchange rate volatility along with the effectiveness of foreign government, relative size of participants, and control of target largely explain the wealth gains to bidders and targets.

Incentives for Banking Megamergers: What Motives Might Regulators Infer from Event-Study Evidence?

Methodologically, this paper frames the opportunity cost of any merger as the value of the alternative deals it precludes or defers. This challenges the standard event-study hypothesis that stock markets benchmark the value of a merger deal by the profits the partners would have earned in stand-alone activity. Substantively, the paper finds that megamergers in banking show two size-related exceptions to the prototypical result that acquirer stock value tends to be unaffected or to fall when a merger is announced. Giant U.S. banking organizations gain value from becoming more gigantic and gain additional value when they absorb an in-state competitor. FINANCIAL INSTITUTION MERGERS and acquisitions are dramatically remolding at least five dimensions of l:J.S. and global banking competition. Dimensions changing most markedly include the number of leading players, their product lines, their front-office and back-office technologies, their geographic reach, and their average size. In the United States, the Bank Holding Company Act assigns central banlers the duty of assessing the private and societal benefits that derive from combinations of very large financial institutions. To fulfill this duty, staff economists seek to identify the motives of each would-be acquirer (Amel 1997). Unfortunately, merger partners often have good reason to hide their true motives from government officials. Virtually every merger application projects improvements in efficiency or portfolio diversification. Authorities must routinely doublecheck the plausibility of these projections. They must also search for private benefits that may flow from increases in monopoly power, managerial entrenchment, or political clout. To evaluate a given merger, regulators must solve three problems. First, they must decide which of the eight possible reasons for merging listed in Table 1 actually apply. Next, they must estimate whether each proposed combination promises