Stress Test Failures and Corporate Mergers and Acquisitions
51 Pages Posted: 25 Jun 2020 Last revised: 13 Oct 2020
Date Written: June 3, 2020
This study documents that corporate borrowers of banks that failed stress tests subsequently conduct fewer mergers and acquisitions (M&A). The effect is stronger for treated firms with weaker corporate governance or more susceptible to managerial agency problems. We further document increased financial covenant usage in M&A-related bank loan contracts, as well as improved M&A deal quality, after stress test failures, suggesting that stress testing failures triggered enhanced bank screening on borrowers’ M&A projects. Moreover, refrained from M&A activity that can hurt shareholders, treated firms subsequently improve their profitability. Our empirical evidence highlights a beneficial spillover effects of bank stress tests.
Keywords: Stress Tests, Mergers and Acquisitions, Bank Screening
JEL Classification: G21, G34
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