Regulatory Arbitrage: Evidence from Bank Cross-Border M&As

46 Pages Posted: 23 May 2011  

Hui Dong

Shanghai University of Finance and Economics - School of Accountancy

Frank M. Song

The University of Hong Kong - School of Economics and Finance

Libin Tao

University of International Business and Economics - School of Banking and Finance

Date Written: May 15, 2011

Abstract

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.

Keywords: Bank Regulation, Mergers and Acquisitions, Regulatory Arbitrage

JEL Classification: G21, G28, F21

Suggested Citation

Dong, Hui and Song, Frank M. and Tao, Libin, Regulatory Arbitrage: Evidence from Bank Cross-Border M&As (May 15, 2011). Available at SSRN: https://ssrn.com/abstract=1849723 or http://dx.doi.org/10.2139/ssrn.1849723

Hui Dong (Contact Author)

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

Frank M. Song

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

Libin Tao

University of International Business and Economics - School of Banking and Finance ( email )

10, Huixin Dongjie
Changyang District
Beijing, Beijing 100029
China

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