Interest Rate Sensitivity as Motivation for Acquisitions: Evidence from Bank Holding Companies

Abstract

We examine the role of interest rate sensitivity for bank acquisitions. We predict and find that banks with greater fixed-rate loan portfolios are more (less) likely to be acquired in decreasing (increasing) rate environments as bank acquirers seek to acquire fixed-rate assets with higher rates than can be achieved through new loan originations. Further, this effect is stronger for targets that cannot fully benefit from their fixed-rate portfolio due to either poor operating performance or a weaker information environment. In further tests we find positive returns for acquirers at the time the fair values of the target are reported. This study sheds light on how bank acquisitions are impacted by interest rate sensitivity in changing interest rate environments and how loan fair value versus book value differences can have economic implications.

Keywords: Acquisitions, Interest Rates, Fair Value, Banking

JEL Classification: E430, E520, G210, G340, M410