Working Paper

Corporate Mergers and Acquisitions Under Lender Scrutiny

Abstract: This paper examines corporate mergers and acquisitions (M&A) outcomes under lender scrutiny. Using the unique shocks of U.S. supervisory stress testing, we find that firms under increased lender scrutiny after their relationship banks fail stress tests engage in fewer but higher-quality M&A deals. Evidence from comprehensive supervisory data reveals improved credit quality for newly originated M&A-related loans under enhanced lender scrutiny. This improvement is further evident in positive stock return reactions to M&A deals financed by loans subject to enhanced lender scrutiny. As companies engage in fewer but higher-quality deals, they also experience higher returns on assets. Our findings highlight the importance of lender scrutiny in corporate M&A activities.

Keywords: Mergers and acquisitions; Lender scrutiny; Stress tests;

JEL Classification: G21; G34;

https://doi.org/10.17016/FEDS.2024.025

Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: Finance and Economics Discussion Series

Publication Date: 2024-04-19

Number: 2024-025