The Wealth Effects of Bank Mergers Post-Dodd-Frank

Abstract

The Dodd-Frank Act (2010) imposed restrictions on bank mergers and acquisitions. This study seeks to empirically assess the effects of these restrictions in order to determine the current state of the U.S. public bank merger market. In comparison to the control period of 2003-2007, the current bank merger market of 2010-2014 is radically different. Namely, the deals are smaller and less frequent but create more shareholder wealth. Using a standard five-day event window [-2, +2] around the date of announcement (day 0) of a merger deal, target firms now have 33% cumulative abnormal returns (CARS)1 post-Dodd-Frank compared to just 20% returns in the prior period; acquiring firms have -0.31% returns post-Dodd-Frank compared to -1.6% returns prior; and the overall deal returns are 3.1% in today’s market, while those returns were only 0.90% in the prior market. These differences in time period cumulative abnormal returns are statistically significant with at least 95% certainty and are robust to a number of cross-sectional controls such as geography, announced premium, and size metrics. Moreover, these results are consistent across the larger ten-day [-5, +4] and forty-day [-30, +9] event windows. They suggest that Dodd-Frank’s restrictions on bank mergers not only led to higher premiums being paid to target firms but also better selection by acquiring firms.