The Economic Impact of Financial Laws: The Case of Bank Merger Control

We use changes in competition and supervisory controls of bank mergers to analyze the impact of announcements of changes in financial laws on the stock prices of banks and non-financial firms. Covering nineteen industrialized countries for the period 1987 to 2004 we find that banks’ stock prices increase with enhanced competition control, whereas those of non-financial firms decrease. Bank stocks earn higher returns when competition control is introduced with a limited antitrust focus and potential reach but with strong procedural independency and transparency. Implementation of competition control further alters the characteristics of the parties involved in bank mergers and acquisitions. In particular target banks are much more profitable following implementation, an outcome seemingly anticipated by stock market investors. Hence the introduction of competition control of bank mergers may have important externalities for the whole regulatory process in the banking sector, as it may limit supervisory discretion in determining merger outcomes. Legal arrangements governing competition and supervisory control of bank mergers may as a consequence have important implications for firm performance in the economy.