Change in Bank Equity Stakes before Merger Completion: An Advance Study

Abstract

This study investigates the relationship between the changes in the shareholdings of the institutional financial/ investment professionals and the firm-specific characteristics of the acquiring companies prior to merger completion. The present study thus serves to identifying the factors dominating investment behaviors of acquiring firms. Both total and average changes in their ownership are considered to test the popular agency and signaling hypotheses. Evidence shows that commercial banks are more likely to increase their equity holdings of those businesses with increasing current liability and decreasing profitability. The former supports the signaling hypothesis but the latter suggests the agency cost hypothesis is correct. Investment banks, on the other hand, prefer those with increasing assets and a stable financial status. A competitive relation of these financial experts is also presented in terms of the pursuit of greater controlling power over the board against each other before the merger completion date. This paper also uses descriptive statistics and logistic regression analysis to examine the relationship between the financial institutional quarters holdings proportion and the financial characteristics of the bidding firms.  Our findings using logistic regression analysis reveal that the commercial banks holdings are more than investment banks holdings in the bidding firms that commercial banks have greater controlling power.