MODERATING EFFECT OF M&A ON THE RELATIONSHIP BETWEEN CREDIT RISK AND BANK VALUE
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Date
2024-02-07
Authors
Ahmad Walid Ramadan Tina
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Abstract
Abstract
This thesis explores the moderating effect of horizontal mergers and acquisitions on the credit risk-bank value relationship. The current literature neglects the moderating analysis that can more transparently explain this complex relationship; relies heavily on event studies, which have misspecification issues in capturing long-term value; and exhibits bias in assessing credit risk. Thus, this thesis utilizes moderating analysis, captures value via the market-to-book ratio, a well-theoretically established measurement, and assesses credit risk via the net charge-offs ratio, a metric resistant to managerial discretion. The sample consists 110 bank holding companies over twenty-three years, and it is analyzed via fixed effects regression and the quantile model.
The results show that credit risk negatively affects bank value; however, this effect becomes less pronounced for larger banks. Moreover, horizontal mergers and acquisitions enhance bank value and further intensify the negative credit risk-bank value relationship, particularly in institutions with higher valuations.
When evaluating expected wealth in a banking institution, investors should assess the bank’s credit risk profile and size. Practitioners and regulators should be more stringent in managing and monitoring credit risk for smaller banks. Mergers and acquisitions offer growth options; however, investors should target low-valued and sound banks, while practitioners should effectively manage credit risk. Regulators should restrict unsound and high-valued banks from engaging in these events.
Keywords: bank value, credit risk, M&A, moderating, panel regression.