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Abstract
This dissertation comprises three independent essays that use empirical evidence from merger activity in the US banking industry to provide new evidence on merger, auction and market efficiency theories. The first essay examines the valuation effects of FDIC auctions of failed banks and provides new evidence from tests of auction theory. I find that bidder abnormal returns around the announcement date of the purchase of a failed bank are significantly positive. I also find that winning bidders in FDIC auctions do not fall victim to the winners curse. Instead, I find some evidence that conditions commonly cited as driving industry fire sales (low levels of industry liquidity combined with industry distress) appear to significantly drive acquirer returns. The second essay uses data from the past 30 years of merger activity in the US banking industry to determine empirically whether shocks to industry fundamentals or stock price misvaluation drive observed merger activity. The study adds to our understanding of merger activity by examining the specific mechanism through which industry changes are translated into an industry-wide merger wave. I show that deregulation in the banking industry led to an increased level and dispersion of risk throughout the industry over time which, in turn, drove increases in both merger activity and aggregate industry stock misvaluation. The third essay examines the effect of market valuation on the loan portfolios and regulatory capital levels of U.S. banks during the financial crisis. I use unique data on bank asset values, gathered from SEC merger documents, to provide a benchmark for asset fair values for a sample of US banks during the financial crisis. Using a sample of banks from 2008 to 2010, I find that bank financial statements consistently underreport the level of impairment in loan portfolios implied by market prices. An examination of failed banks, ex-post, finds significant evidence that distressed assets were not properly accounted for, helping market value insolvent banks to report adequate capital for regulatory purposes. A conservative estimate of the costs of forbearance to the deposit insurance fund in 2009 and 2010 is roughly $15 billion.