Regulatory Arbitrage: Evidence from Bank Cross-Border M&As
Shanghai University of Finance and Economics - School of Accountancy
Frank M. Song
The University of Hong Kong - School of Economics and Finance
University of International Business and Economics - School of Banking and Finance
May 15, 2011
Using a database of more than 2,000 international bank M&A deals completed between 1990 and 2007 and the unique bank regulation data collected by Barth, Caprio, and Levine (2006), we analyze the effects of bank regulations on bank’s cross-border M&As around the world. Results suggest that banks have strong incentives to expand into lightly regulated countries, indicating that banks’ international footing provides them a natural way of regulatory arbitrage. Also we find that the takeover premium is increasing if the target bank is located in a country with less stringent capital requirement, more independence of supervisory authority, and lower standards of disclosure requirement. Given that regulators are concerned about the shareholders of their domestic banks, they may lower their bank regulation standards in order to provide domestic banks with an advantage over foreign banks and increase their profitability. Therefore, our paper provides an explanation of “competition in laxity” of bank regulations in individual countries. Further, we provide evidence that there is no significant increase in the financial performance in the combined banks, partly due to the motivation of regulatory arbitrage of bank managers in cross-board M&As.
Number of Pages in PDF File: 46
Keywords: Bank Regulation, Mergers and Acquisitions, Regulatory Arbitrage
JEL Classification: G21, G28, F21
Date posted: May 23, 2011
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