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Capital Adequacy, Bank Mergers, and the Medium of Payment
Author(s) -
Grullon Gustavo,
Michaely Roni,
Swary Itzhak
Publication year - 1997
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/1468-5957.00097
Subject(s) - business , monetary economics , capital adequacy ratio , cost of capital , payment , equity (law) , capital requirement , stock (firearms) , financial system , mergers and acquisitions , finance , economics , microeconomics , profit (economics) , mechanical engineering , political science , law , engineering
We examine how banks' capital requirements affect the way bank mergers are financed, as well as the stock‐market reaction to the merger announcement. We find that the capital position of the acquirer is one of the two factors most strongly influencing the choice of financing method; the other is the relative size of the merging banks. The smaller the acquirer in relation to the target bank and the higher the acquirer's capital adequacy ratio, the more likely it is that the acquisition will be financed by a stock swap. The capital requirements also affect the market reaction, through their effect on the financing method choice. The value of the acquirer's equity decreases more at the time of the merger announcement if the method of payment is stock. Like prior studies, we find that the abnormal return on the target banks' stock is positive.