Bank Screening and Mergers and Acquisitions: Evidence from Stress Test Failures

Abstract

Corporate borrowers of banks that failed stress tests subsequently conduct fewer mergers and acquisitions (M&A). The effect is driven by enhanced ex-ante screening by stress test failure banks on borrower firms’ new M&A projects, as reflected by the improved internal credit rating for newly originated M&A-related loans. Moreover, M&A quality improves only when these deals are financed by new loans arranged by stress test failure banks. Finally, in line with treatment firms refraining from M&A that can harm shareholders, these firms subsequently improve their profitability. Taken
together, the evidence highlights the important spillover of supervisory stress tests on corporate M&A.

Keywords: Mergers and Acquisitions; Ex-ante Bank Screening; Stress Tests Failures

JEL Classification: G21, G34