The Impact of Interstate Banking Legislation on Target and Buyer Bank Stock Returns

Abstract

There has been a loosening of the regulation governing the market for corporate control in the banking industry. Nearly every state in the U.S. has passed some form of interstate banking legislation that allows out‐of‐state banks to acquire local banks. Previous research has shown that the market reaction to this state legislation is both positive and significant for affected bank stocks. What is not clear from prior research is whether all banks are positively affected by the legislation or just banks that are likely acquisition targets. This study measures the impact on both subsequent buyer and target banks. Results indicate that the reaction is a general effect reflecting positive expectations for the industry. The buyer group sustains a significant five percent increase during the event window and the target group increase is over seven percent. The higher return for the target group may reflect an additional acquisition premium. However, the difference between the two groups is not significant. Tests utilizing market value as a proxy for acquisition attractiveness demonstrate that size does not impact the results.

Citation

Black, H.A., Fields, M.A. and Schweitzer, R.L. (1996), "The Impact of Interstate Banking Legislation on Target and Buyer Bank Stock Returns", Managerial Finance, Vol. 22 No. 7, pp. 24-42. https://doi.org/10.1108/eb018569