Banking Crisis and Mergers – The Case of Japan

In contexts where banks have strong control over firms, banking crisis may be associated with merger activity. This is because banks’ risk is reduced when their clients merge, and financial trouble creates strong incentive for banks to facilitate mergers of clients to improve banks’ risk standing. During Japan’s banking crisis in the 1990s, corporate merger activity was correlated with banks’ financial trouble. Banks of merger firms were unhealthy, and on average gained positive abnormal returns upon announcements of mergers between their clients. Wealth gain to banks partially stemmed from acquirer pre-merger slack, which could be used postmerger to redeem bank loans to the total merged firms. (JEL G21, G34, N25)