Bank acquisition and stockholders' wealth

Bank mergers are a control mechanism for reallocating resources because regulation has a pervasive influence on bank decision making. Unlike industrial firms, bank mergers are subject to regulatory approval. Bank shareholder returns are analyzed at the time of Federal Reserve approval of mergers to assess whether regulation reduces differential information between bank managers and outsiders or reduces managers' ability to take advantage of differential information. Empirical tests indicate there are negative returns to acquiring banks for external mergers but normal returns for internal mergers; emergency mergers generate positive returns before and upon announcement; more negative results occur in states with branching restrictions and in cases when equity financing is used.