Uncertainty or Misvaluation? New Evidence on Determinants of Merger Activity from the Banking Industry
Loveland, R., and K. Okoeguale, 2016. Uncertainty or Misvaluation? New Evidence on Determinants of Merger Activity from the Banking Industry. The Financial Review (Forthcoming)
59 Pages Posted: 15 Jan 2013 Last revised: 21 Jan 2016
Date Written: January 20, 2016
We use data from the past 30 years of takeover activity in the U.S. banking industry to test competing neoclassical and misvaluation merger theories. Test results are consistent with evidence in the literature that merger activity is significantly related to both structural industry change and stock price misvaluation. Our primary contribution is to show that changes in misvaluation reflect a rise in industry-wide risk taking and that increases in risk originate from changes in industry structure due to deregulation. A measure of bank risk taking subsumes the power of stock price misvaluation to explain subsequent merger activity.
Keywords: Mergers and Acquisitions, Deregulation, Banking, Idiosyncratic Risk
JEL Classification: G21, G34, G38
Suggested Citation: Suggested Citation