The Gains from Takeover Deregulation: Evidence from the End of Interstate Banking Restrictions

Authors

  • Yaron Brook,

    1. Santa Clara University
    Search for more papers by this author
    • Brook and Hendershott are at Santa Clara University; Lee is at Kennesaw State University. We thank Stephen Cosslett, Edward Kane, Patric Hendershott, Atulya Sarin, René Stulz, the editor, an anonymous referee, and seminar participants at Ohio State University for their helpful comments. Financial support for this research was provided by a Santa Clara University Presidential research grant and by the Dean Witter Foundation.
  • Robert Hendershott,

    1. Santa Clara University
    Search for more papers by this author
    • Brook and Hendershott are at Santa Clara University; Lee is at Kennesaw State University. We thank Stephen Cosslett, Edward Kane, Patric Hendershott, Atulya Sarin, René Stulz, the editor, an anonymous referee, and seminar participants at Ohio State University for their helpful comments. Financial support for this research was provided by a Santa Clara University Presidential research grant and by the Dean Witter Foundation.
  • Darrell Lee

    1. Kennesaw State University
    Search for more papers by this author
    • Brook and Hendershott are at Santa Clara University; Lee is at Kennesaw State University. We thank Stephen Cosslett, Edward Kane, Patric Hendershott, Atulya Sarin, René Stulz, the editor, an anonymous referee, and seminar participants at Ohio State University for their helpful comments. Financial support for this research was provided by a Santa Clara University Presidential research grant and by the Dean Witter Foundation.

Abstract

This paper uses interstate banking deregulation to explore the benefits of takeover deregulation and how these benefits are distributed across different firms. We find large and significant abnormal returns around the Interstate Banking and Branching Efficiency Act of 1994 which imply it created $85 billion of value in the banking industry. Consistent with an active market for corporate control allowing beneficial consolidation and providing needed discipline, there is a strong negative relationship between banks' abnormal returns and their prior performance. Consistent with managerial entrenchment limiting takeover discipline, banks with higher insider ownership, lower outside block ownership, and/or less independent boards have lower abnormal returns.

Ancillary