The effect of mergers on US bank risk in the short run and in the long run

Brealey, R A, Cooper, I A and Kaplanis, E (2019) The effect of mergers on US bank risk in the short run and in the long run. Journal of Banking and Finance, 108. ISSN 0378-4266

Abstract

We examine changes in risk following US bank mergers in the period 1981-2014. Short-run (two-year) increases in acquirer risk following mergers occur only in the first few mergers undertaken by the same acquirer, not in the later ones. They occur only in the stocks’ sensitivity to banking industry risk and not in bank-specific risk. The equity volatility of acquirers does not increase, but diversification benefits are entirely dissipated. Using a new approach to measure the long-run effect we find that these results persist, consistent with banks maintaining a constant level of total equity risk in the long run. We measure the loss of diversification of the US bank industry associated with mergers and find it to be 40% of the risk level in 1981. Almost all of this occurred prior to 2004. In addition, there has been a large increase in correlations between the largest banks, much of which has come from sources other than mergers.