Target's Corporate Governance and Bank Merger Payoffs

36 Pages Posted: 6 Feb 2008

See all articles by Julapa Jagtiani

Julapa Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Elijah Brewer

DePaul University - Department of Finance; Federal Reserve Bank of Chicago

Date Written: December 2007


Commercial bank merger and acquisition (M&A) transactions are especially informative for analyzing the impact of differing corporate governance structures on the balance of corporate control between managers and shareholders. We exploit these special characteristics to investigate the balance of control between top-tier managers and shareholders using data from bank M&A transactions over the period 1990-2004. Unlike research on non-financial firms, the impacts of independent directors, managerial share ownership, and independent blockholders on bank merger purchase premiums in this environment are likely to be measured more consistently because of industry operating standards and regulations. It is also the case that research on banks in this area has not received adequate attention. Our model controls for risk characteristics of the target and the acquiring banks, the deal characteristics, and the economic environment. The results are robust. Our results are consistent with those found for non-financial firms, and are consistent with the hypothesis that independent directors could provide an important internal governance mechanism for protecting shareholders' interests especially in large scale transactions such as mergers and takeovers. We also find results consistent with the conflict of interest argument, where top-tier managers tend to trade potential takeover gains in return for their own personal benefits, such as job security and other employment related perquisites. Our overall findings would support policies that promote independent outside directors on the board of commercial banking firms in order to provide protection for shareholders and investors at large.

Keywords: Corporate governance, bank merger, merger purchase premium, performance, bank holding companies

JEL Classification: G2, G21, G28, G3

Suggested Citation

Jagtiani, Julapa A. and Brewer, Elijah, Target's Corporate Governance and Bank Merger Payoffs (December 2007). Available at SSRN: or

Julapa A. Jagtiani (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

Elijah Brewer

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
United States

Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

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