Regulatory Size Thresholds and Merger and Acquisition Behavior

Abstract

Size threshold-based regulatory requirements are pervasive, but little is known about how they affect the merger and acquisition (M&A) behavior of firms around the thresholds. M&As cause discrete increases in size, so we hypothesize changes in firms’ M&A behavior near regulatory size thresholds. Our identification strategy relies on size thresholds imposed by the Dodd-Frank Act. We develop a novel research design that estimates indirect treatment effects for banks just below the thresholds. We find strong evidence of indirect treatment effects on M&A behavior. Our results also illustrate the limitations of a standard difference-in-differences approach to studying events that involve size thresholds.

Keywords: Dodd-Frank Act, regulatory costs, bank size, acquisitions

JEL Classification: G18, G21, G28