Research Discussion Papers, Bank of Finland
No 4/2010:
Cross-border bank M&As and risk: evidence from the bond market
Sungho Choi, Bill B Francis and Iftekhar Hasan ()
Abstract: The impact of cross-border bank M&As on bank risk remains
an open question. Though geographically diversifying bank M&As have the
potential to reduce the risk of bank insolvency, they also have the
potential to increase that risk due to the increase in risk-taking
incentives for bank managers and stockholders following these transactions.
This paper empirically investigates whether cross-border bank M&As increase
or decrease the risk of acquiring banks as captured by changes in
acquirers’ yield spreads. The paper also investigates how differences in
the institutional environments between bidder and target countries affect
changes in yield spreads following M&A announcements. The study finds that
bondholders, in general, perceive cross-border bank M&As as risk-increasing
activities, unlike domestic bank mergers. Specifically, on average, yield
spreads increase by 4.13 basis points following the announcement of
cross-border M&As. This study also finds that these yield spreads are
significantly affected by the differences in investor-protection and
deposit-insurance environments between the transacting countries. However,
the study does not find that the regulatory and supervisory environment in
the home countries of the transacting parties significantly affects the
changes in yield spreads. The overall evidence suggests that regulators
should judge the relative environment in both the home and the host
countries in evaluating the associated risks of an active multinational
financial institution and in setting the sufficiency of the banks’ reserve
positions.
Keywords: bank risk; cross-border; M&A; yield spreads; (follow links to similar papers)
JEL-Codes: F23; G14; G21; G34; (follow links to similar papers)
47 pages, February 21, 2010
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