The Impact of Bank Consolidation on Commercial Borrower Welfare
55 Pages Posted: 8 Nov 2000
Date Written: February 2004
We estimate the impact of bank merger announcements on borrowers' stock prices for publicly traded Norwegian firms. In addition, we analyze how bank mergers influence borrower relationship termination behavior and relate changes in the propensity to terminate to borrower abnormal returns. We find that borrowers lose, on average, about 0.8 percent in equity value when an announcement identifies their bank as a merger target. Smaller borrowers of target banks are especially hurt in mergers involving two large banks, where they lose an average of about 1.8 percent. In contrast, borrowers of acquiring banks tend to earn positive abnormal returns. These results suggest that the welfare of borrowers may be influenced by a strategic focus that favors acquiring borrowers. In addition, bank mergers lead to higher relationship exit rates among borrowers of target banks, and small bank mergers lead to larger increases in exit rates than large mergers. Finally, larger merger-induced increases in relationship termination rates are associated with higher abnormal returns. These results suggest that when a bank merger is harmful to borrowers, firms with low switching costs switch banks while similar firms with high switching costs are locked in to their current relationship.
Keywords: Bank relationships, bank mergers, market power
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