Abstracts Economics

Essays on the effects of bank mergers

by Charles B. Ruscher

Chapter one presents evidence that a strong lending relationship exists between borrower firms and their commercial bank lenders that is altered by bank mergers. Negative abnormal stock returns experienced by firms borrowing from banks are investigated to ascertain the explanatory power of the relationship lending hypothesis. Negative returns are found to be attributable to the change in the lending relationship brought about by bank mergers. In addition, we find evidence of a delayed capital-market response by borrower firm stockholders to bank merger events. We conclude that borrower firms incur significant economic costs in response to changes in their banking relationships resulting from bank mergers. Chapter two tests the hypothesis of managerialism, defined as top executives seeking to maximize their own wealth in terms of compensation and perquisites rather than maximization of the banking firm's value. This chapter presents evidence contrary to the managerialism hypothesis. It appears the 1991 FDICIA law has effectively mitigated managerialism in the ranks of top bank executives. However, the evidence also suggests that executives in upper-middle management of merged banks have not been constrained by FDICIA. These upper middle-level executives consistently receive higher compensation than their non-merged peers.