UPPORTED BY U NIGESTION “ Regulatory arbitrage and cross-border bank acquisitions ”

We study how differences in bank regulation influen c cross-border bank acquisition flows and share price reactions to cross-border deal announcements. Using a sample of 5,125 domestic and 793 majority cross-border deals announced between 1995 and 2008, we find evidence of a form of “regulatory arbitrage” in that cross-border bank ac quisition flows involve primarily acquirers from countries with stronger supervision and stricter ca pital requirements than those of their targets. However, we also show that target and aggregate abn ormal returns around the deal announcements are higher when acquirers come from countries with more restrictive bank regulatory environments even after accounting for the acquirer’s other attribute s. These market reactions are consistent with a mor e benign form of “regulatory arbitrage” than one that is associated with a potentially destructive “race to the bottom” in which national bank regulators becom e less able to constrain excess risk-taking. Friday, March 8th, 10.30-12.00 Room 126, 1st floor of the Extranef building at the University of Lausanne Regulatory arbitrage and cross-border bank acquisitions G. Andrew Karolyi and Alvaro G. Taboada 1 This version: January 2013 Abstract We study how differences in bank regulation influence cross-border bank acquisition flows and share price reactions to cross-border deal announcements. Using a sample of 5,125 domestic and 793 majority cross-border deals announced between 1995 and 2008, we find evidence of a form of “regulatory arbitrage” in that cross-border bank acquisition flows involve primarily acquirers from countries with stronger supervision and stricter capital requirements than those of their targets. However, we also show that target and aggregate abnormal returns around the deal announcements are higher when acquirers come from countries with more restrictive bank regulatory environments even after accounting for the acquirer’s other attributes. These market reactions are consistent with a more benign form of “regulatory arbitrage” than one that is associated with a potentially destructive “race to the bottom” in which national bank regulators become less able to constrain excess risk-taking.We study how differences in bank regulation influence cross-border bank acquisition flows and share price reactions to cross-border deal announcements. Using a sample of 5,125 domestic and 793 majority cross-border deals announced between 1995 and 2008, we find evidence of a form of “regulatory arbitrage” in that cross-border bank acquisition flows involve primarily acquirers from countries with stronger supervision and stricter capital requirements than those of their targets. However, we also show that target and aggregate abnormal returns around the deal announcements are higher when acquirers come from countries with more restrictive bank regulatory environments even after accounting for the acquirer’s other attributes. These market reactions are consistent with a more benign form of “regulatory arbitrage” than one that is associated with a potentially destructive “race to the bottom” in which national bank regulators become less able to constrain excess risk-taking. JEL Classification Codes: G21; G28; G34; G38.