MFIN 6205 Financial Risk Management for Financial Institutions
Journal of Banking & Finance 23 (1999) 255±285
Interest-rate exposure and bank mergers
Benjamin Esty
a,*
, Bhanu Narasimhan b, Peter Tufano
c
a b Harvard Business School, Morgan Hall 481, Boston, MA 02163, USA
Marakon Associates, 2831 Malabar Ave., Santa Clara, CA 95051, USA c Harvard Business School, Morgan Hall 377, Boston, MA 02163, USA
Abstract
This study examines how interest rates and interest-rate exposures aect the level of acquisition activity, the identities of targets and acquirers, and the pricing of acquisitions in the banking industry. Using a sample of 477 large mergers from 1980 to 1994, we ®nd that the level of acquisition activity is more positively correlated with equity indices and more negatively correlated with interest rates for banks than for non-banks. Although we ®nd that targets and acquirers have signi®cantly dierent interest-rate exposures, we
®nd little evidence that one group is consistently better or worse positioned, ex post, for various interest-rate environments. Finally, we ®nd some evidence that merger pricing is a function of the interest-rate environment, with acquirers paying higher prices and earning lower returns when rates are low (and when more deals are announced). Ó 1999 Elsevier Science B.V. All rights reserved.
JEL classi®cation: G21; G32; G34
Keywords: Mergers; Interest rate exposure; Risk management; Banks
1. Introduction
Bank executives and industry analysts would readily agree that interest-rate exposure is important to depository institutions. Research shows that interest rate movements aect bank earnings and value, and banks explicitly
*
Corresponding author. Tel.: 1 617 495 6159; fax: 1 617 496 8443; e-mail: besty@hbs.edu
0378-4266/99/$ ± see front matter Ó 1999 Elsevier Science B.V. All rights reserved.
PII: S 0 3 7 8 - 4 2 6 6 ( 9 8 ) 0 0 0 8 1 - 8
256
B. Esty et al. / Journal of Banking & Finance 23 (1999) 255±285
acknowledge this impact in
Interest-rate exposure and bank mergers
Benjamin Esty
a,*
, Bhanu Narasimhan b, Peter Tufano
c
a b Harvard Business School, Morgan Hall 481, Boston, MA 02163, USA
Marakon Associates, 2831 Malabar Ave., Santa Clara, CA 95051, USA c Harvard Business School, Morgan Hall 377, Boston, MA 02163, USA
Abstract
This study examines how interest rates and interest-rate exposures aect the level of acquisition activity, the identities of targets and acquirers, and the pricing of acquisitions in the banking industry. Using a sample of 477 large mergers from 1980 to 1994, we ®nd that the level of acquisition activity is more positively correlated with equity indices and more negatively correlated with interest rates for banks than for non-banks. Although we ®nd that targets and acquirers have signi®cantly dierent interest-rate exposures, we
®nd little evidence that one group is consistently better or worse positioned, ex post, for various interest-rate environments. Finally, we ®nd some evidence that merger pricing is a function of the interest-rate environment, with acquirers paying higher prices and earning lower returns when rates are low (and when more deals are announced). Ó 1999 Elsevier Science B.V. All rights reserved.
JEL classi®cation: G21; G32; G34
Keywords: Mergers; Interest rate exposure; Risk management; Banks
1. Introduction
Bank executives and industry analysts would readily agree that interest-rate exposure is important to depository institutions. Research shows that interest rate movements aect bank earnings and value, and banks explicitly
*
Corresponding author. Tel.: 1 617 495 6159; fax: 1 617 496 8443; e-mail: besty@hbs.edu
0378-4266/99/$ ± see front matter Ó 1999 Elsevier Science B.V. All rights reserved.
PII: S 0 3 7 8 - 4 2 6 6 ( 9 8 ) 0 0 0 8 1 - 8
256
B. Esty et al. / Journal of Banking & Finance 23 (1999) 255±285
acknowledge this impact in