A Study of Consolidations between Banks and Non-Banks: Motivations and Consequences

Date

2008-01

Authors

Yi, Ha Chin

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Abstract

This study focuses on the reasons for and the implications of banks' decisions to acquire non- bank financial service firms (non-banks). The choice to acquire non-banks is driven by both external forces such as deregulation and regulatory capital and by internal forces such as a diversification strategy and efforts to enhance revenue and return to equity holders. We find that whereas the impact of acquiring non-banks increases their non-interest income, it also increases their non-interest expense. The net effect of choosing non-bank acquisitions lowers their subsequent return on assets, market value, and stock returns, as well as increasing their risk. However, the non-bank acquisitions do significantly increase the acquiring banks top executives' subsequent compensation. We conclude that non-bank acquisitions are driven by both regulatory and strategic forces within the banking industry. However, such acquisitions manifest into agency problems.

Description

Research Enhancement Program Final Report

Keywords

banks, financial service firms, financing, financial motivations

Citation

Yi, H. C. (2008). A study of consolidations between banks and non-banks: Motivations and consequences. Research Enhancement Program, Texas State University, San Marcos, TX.

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