The Long-Run Benefits of Losing Failed Bank Auctions

Abstract

Using a proprietary database of failed bank auction participants, I examine whether acquiring a failed bank creates shareholder value by using the losers' post-acquisition performance as a counterfactual. In the three years post-acquisition, acquirers with Shared-Loss Agreements (SLAs), where the FDIC absorbs approximately 80% of losses, realize abnormal returns that are 19.8% lower than auction losers. Inconsistent with the effects of a winner's curse, returns are not related to bidder competition. However, post-acquisition, acquirers with SLAs realize declines in volatility and lending risk, suggesting that a reduction in risk plays a role in explaining this divergence in long-run returns.

Keywords: financial institutions, regulation, market efficiency, auctions

JEL Classification: G01, G14, G21, G28, D44