Does the acquiring bank ’ s capital level affect post - acquisition performance ?

Holding capital is costly for banks. Nevertheless, banks have operated with (varying degrees of) excess capital over the past decade. Because under current regulatory practice there is an inverse link between bank capital and regulatory scrutiny, it is reasonable to conjecture that banks with more capital are subject to fewer regulatory restrictions. One important decision where regulatory scrutiny may be affected by the bank's capital level is mergers. I build a theoretical model which explores the impact of this link on merger performance and generates predictions which I test empirically. Consistent with my model, I find that high-capital acquirers are the worst performers and underperform low-capital acquirers in the long-run. The presence of a large shareholder weakens the impact of capital: high-capital acquirers with dispersed ownership perform significantly worse than high-capital acquirers with concentrated ownership. Abstract: Holding capital is costly for banks. Nevertheless, banks have operated with (varying degrees of) excess capital over the past decade. Because under current regulatory practice there is an inverse link between bank capital and regulatory scrutiny, it is reasonable to conjecture that banks with more capital are subject to fewer regulatory restrictions. One important decision where regulatory scrutiny may be affected by the bank's capital level is mergers. I build a theoretical model which explores the impact of this link on merger performance and generates predictions which I test empirically. Consistent with my model, I find that high-capital acquirers are the worst performers and underperform low-capital acquirers in the long-run. The presence of a large shareholder weakens the impact of capital: high-capital acquirers with dispersed ownership perform significantly worse than high-capital acquirers with concentrated ownership.