Stress Test Failures and Corporate Mergers and Acquisitions

51 Pages Posted: 25 Jun 2020 Last revised: 13 Oct 2020

See all articles by Buhui Qiu

Buhui Qiu

University of Sydney Business School; Financial Research Network (FIRN)

Teng Wang

Board of Governors of the Federal Reserve System

Date Written: June 3, 2020

Abstract

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

Suggested Citation

Qiu, Buhui and Wang, Teng, Stress Test Failures and Corporate Mergers and Acquisitions (June 3, 2020). Proceedings of Paris December 2020 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3617543 or http://dx.doi.org/10.2139/ssrn.3617543

Buhui Qiu (Contact Author)

University of Sydney Business School ( email )

Room 513, The Codrington Building
The University of Sydney
Sydney, NSW 2006
Australia
+61 2 9036 6435 (Phone)
+61 2 9351 6461 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/buhuiq

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

Teng Wang

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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