Do Banks Overbid When Acquiring Failed Banks?
When a commercial bank fails, the FDIC usually arranges a takeover of the failed bank with an existing financial institution under a purchase and deposit assumption. The purposes of this paper are to measure the share price effects of these mergers and to compare this performance to empirical results from nonfinancial mergers. The results indicate that the mergers are viewed favorably initially, but shortly after the merger the average geometric residual returns become negative and continue to decline. These findings are consistent with the conclusion that the markets for failed banks are competitive and also consistent with the view that the acquiring banks overbid for the failed banks. Finally, the decline in abnormal returns of acquiring banks after the mergers is not similar to the empirical evidence of abnormal returns of acquiring firms in nonfinancial mergers.