Asymmetric-Information and Principal-Agent Problems as Sources of Value in Fslic-Assisted Acquisitions of Insolvent Thrifts

Abstract

This study uses a two-factor market-model to estimate excess returns around 43 announcements of FSLIC-assisted thrift mergers and 66 announcements of unassisted thrift mergers. These estimated excess returns are then used to test hypotheses about asymmetric-information and principal-agent problem in the thrift resolution process as sources of value in these mergers. The results show that acquirers in assisted transactions earned positive and statistically significant excess returns of approximately 2 percent, whereas acquirers in unassisted transactions earned excess returns that are not significantly different from zero; however, the excess returns in the assisted mergers are quantitatively small. For the 43 assisted mergers, estimated excess returns imply aggregate wealth transfers of only $13 million as compared with $2.3 billion in FSLIC assistance that were granted in these transactions. These findings suggest that the FSLIC-assisted transactions were reasonably well-structured and that the assistance granted did not result in large wealth transfers from the FSLIC and taxpayers to acquirers of insolvent institutions. Finally, the study provides evidence that informational asymmetries and principal-agent problems in the thrift resolution process were significant sources of excess returns for the acquirers receiving FSLIC assistance.

Keywords: asymmetric information, deposit insurance, failure, FHLBB, FIRREA, FSLIC, insolvency, merger, OTS, principal-agent, RTC, S&L, thrift

JEL Classification: C25, G18, G21, G33, G38, E53