Regulatory Arbitrage and Cross‐Border Bank Acquisitions

Abstract

We study how differences in bank regulation influence cross-border bank acquisition flows and share price reactions to cross-border deal announcements. Using a sample of 7,297 domestic and 916 majority cross-border deals announced between 1995 and 2012, we find evidence of a form of "regulatory arbitrage" whereby acquisition flows involve acquirers from countries with stronger regulations than their targets. Target and aggregate abnormal returns around deal announcements are positive and larger when acquirers come from more restrictive bank regulatory environments. We interpret this evidence as more consistent with a benign form of regulatory arbitrage than a potentially destructive one.

Regulatory Competition and the Market for Corporate Law

“…Our counterfactual analysis indicates that if Delaware changed its laws to adopt stronger anti-takeover protections, it could lose about 11 percent of its market share and between $35-$70 million in franchise taxes per year. These findings are consistent with other studies of regulatory competition that support the "bonding" hypothesis, which asserts that managers are willing to commit to stronger shareholder monitoring to attract capital (see e.g., Doidge et al, 2004;Karolyi and Taboada, 2015).…”

Are Chinese Acquirers Discriminated against in Cross‐border Mergers and Acquisitions? An Analysis Based on Covered Transactions Filed with CFIUS

“…H n denotes the industry fixed effects, while the industry classification is drawn from the first two digits of the target's North American Industry Classification System (NAICS) code. Moreover, a set of control variables, X i,t-1 , according to Karolyi and Taboada (2015), are introduced into the model: GDP_growth i,t-1 , which denotes the difference in GDP growth rate between country i and the US; GDP_percapita i,t-1 , which denotes the difference of per capita income between country i and the US; governance_ index i,t-1 , which denotes the difference in governance index between country i and the US; and ex_return i,t-1 , which denotes changes in exchange rates expressed in US dollars of country i's currency. The exchange rate data is obtained from the Bureau van Dijk (BvD) database and the other data used in constructing control variables is from the World Bank database.…”

“…A i denotes the country fixed effect, B t denotes the time fixed effect. We also include a set of control variables, X i,t-1 , according to Karolyi and Taboada (2015), as in Equation (1).…”

The Role of Regulatory Arbitrage in U.S. Banks' International Flows: Bank‐level Evidence

“…Ongena, Popov, and Udell (2013) find that stricter bank activity restrictions and higher capital requirements at home lower banks' business lending standards abroad. Frame, Mihov, and Salz (2017) show that U.S. banks locate their subsidiaries in host countries with lax bank regulations, and Karolyi and Taboada (2015) find that banks in strictly regulated countries engage in cross-border mergers with less-regulated targets. Carbo-Valverde, Kane, and Rodriguez-Fernandez's (2012) results also indicate arbitrage in cross-border bank mergers.…”