Why Do Banks Participate in a FDIC Failed Bank Auction? A study on both winning and non-winning bidders’ performance

Abstract

The recent Global Financial Crisis provides a great opportunity to study banking mergers, especially ones with failed targets and government assistance. In our study, we adopt multiple approaches to study two main questions. First, we are interested to learn if mergers lead to real economic synergies for combined entities using operating measures. We adopt Propensity Score Matching to compare failed bank acquirers to their close peers. Results show that acquirers in regulatory mergers experience significant improvements in both profitability and cost efficiency immediately after the merger transaction. In addition, we are interested in learning whether participation in a failed bank auction benefits a participant even when this participant is not eventually chosen as the acquirer. Our theory is that participation in the auction reduces information asymmetry and improves the credibility of the participant, a phenomena we call the “Certification Effect”. Traditional event study methodology is applied and results show that acquirers in regulatory mergers tend to experience significantly positive market reaction, which is rationalized by their outperformance in operation. More interesting, we find that the market reaction to first time participation in failed bank auctions is significantly higher than the market reaction to the announcement of participation by an experienced participant. This result holds for both the successful or unsuccessful bidder groups.