A number of studies suggest that banks involved in mergers and acquisitions tend to reallocate their loan portfolio generating welfare effects for borrowers of the just-merged institutions. Gains from bank mergers may be offset by increases in market power and negative informational effects on the availability of credit of borrowers that depend on relationship-based lending. On the other hand, other borrowers may benefit if bank mergers increase efficiency and credit capacity and they can extract some of the gains. We test these hypotheses employing a large sample of privately owned firms and analyze if their credit availability is affected by the involvement of one or more of their lenders in a merger or an acquisition. Following the literature on investment and financing constraints, we also test whether banking consolidation affects the investment-cash flow sensitivity of borrowers of banks that have merged. Finally, we focus on the effects of bank mergers and acquisitions on firms that should be more sensitive to disruptions in credit markets i.e. those that are small, rely on few banks, have high observed credit risk. JEL Classification: G21, G34.

Illinois University, and 2000 FMA meetings for suggestions. We also thank Victor Cancel Garcia and Diana Kakoma for data assistance. †Corresponding authorBank Mergers, the Market for Bank CEOs, and Managerial Incentives Compensation of bank CEOs increases after mergers, suggesting that executives may engage in acquisitions to enjoy size-related personal benefits (Bliss and Rosen, 2001). Alternatively, bank mergers can be viewed as the efficient assignation of merged assets to the managerial team best suited to realize merger gains. Theories of executive compensation based on managerial productivity and optimal incentives suggest, therefore, that changes in CEO compensation are related to the potential gains from merger, not merely merger-related size increases. We examine mergers among billiondollar banks in the 1990s and find results consistent with managerial productivity. Specifically, we show empirically that CEO compensation changes following mergers are positively related to anticipated gains from merger measured at the announcement date. Other changes in the structure of compensation are also consistent with hypotheses based on managerial productivity and incentive restructuring.

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Been. ” 1 Using a breathtaking array of facts and figures, the paper described in great detail the dramatic changes that had occurred in the U.S. commercial banking industry over the 15 years from 1979 to 1994. The banking industry was transformed during that period, according to the paper (p. 127), by “the massive reduction in the number of banking organizations; the significant increase in the number of failures; the dramatic rise in offbalance sheet activities; the major expansion in lending to U.S. corporations by foreign banks; the widespread adoption of ATMs;... and the opening up of interstate banking markets. ” The paper went on to explain that most of these major changes in banking could be traced to two developments:

In a partial-equilibrium model, removing a binding constraint creates value. However, in general equilibrium, the stakes of other parties in maintaining the constraint must be examined. In financial deregulation, the fear is that expanding the scope and geographic reach of very large institutions might unblock opportunities to build market power from informational advantages and size-related safety-net subsidies. This paper reviews and extends event-study evidence about the distribution of the benefits and costs of relaxing longstanding geographic and product-line restrictions on U.S. financial institutions. The evidence indicates that the new financial freedoms may have redistributed rather than created value. Event returns are positive for some sectors of the financial industry and negative for others. Perhaps surprisingly, where customer event returns have been investigated, they prove negative.

Copyright reserved. Subject to the exception provided for by law, no part of this publication may be reproduced and/or published in print, by photocopying, on microfilm or in any other way without the written consent of the copyright holder(s); the same applies to whole or partial adaptations. The publisher retains the sole right to collect from third parties fees payable in respect of copying and/or take legal or other action for this purpose. “WILL THE ADOPTION OF BASEL II ENCOURAGE INCREASED

A pervasive trend in the U.S. banking industry over the past two decades has been the steady shift towards activities that generate fees, service charges, trading revenue, and other types of non-interest income. For the period from 1952 to 1977, non-interest income was a readily stable source of revenue for

We examine the effect of incentive-based compensation on bank mergers. Controlling for other characteristics, we find that banks with higher pay-performance sensitivity (PPS) are less likely to engage in mergers. However, when these high PPS managers do undertake mergers, financial markets expect good results and react positively. We find positive abnormal announcement returns for both bondholders and stockholders for banks with high PPS executives. Following acquisitions, these banks also experience significantly more improvement in their operating performance as measured by ROA. Keywords: Pay-for-Performance Sensitivity, CEO Compensation, Acquirer Returns Top executive pay has increased substantially over the last three decades: the average total remuneration for CEOs in S&P 500 firms (in 2002 constant dollars) increased from $850,000 in 1970 to over $14 million in 2000, and in the same period, the average value of options soared from near zero to over $7.0 million (Jensen, Murphy, and Wruck, 2002).

We examine the determinants and stock price impact of voluntary managerial synergy disclosures using hand-collected synergy announcements for M&A transactions between U.S. public companies over the period 1995-2008. We find that the synergy disclosure decision is positively influenced by deal complexity, and negatively influenced by proprietary costs. Once controlled for the endogeneity of the disclosure decision, synergy disclosures result in more favorable stock price reactions for the acquiring firm. Overall, our findings suggest that synergy disclosures are used as a signaling tool by acquirers likely to suffer from high asymmetric information.