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The governance of banks: How do bank capital and monitoring impact post-acquisition risk taking and performance?

This paper theoretically and empirically examines how three corporate governance mechanisms - bank capital, regulatory monitoring and large shareholder monitoring - affect an acquiring bank's post- acquisition risk taking and performance. My model predicts that regulatory monitoring will be less stringent for high-capital acquirers than for low-capital acquirers and that as a result, high-capital acquirers engage in acquisitions that underperform those of low-capital acquirers and increase risk more. Moreover, my model predicts that the presence of a large shareholder mitigates the acquisition inefficiency of high- capital banks: high-capital acquirers with a large shareholder should perform significantly better than do high-capital acquirers without a large shareholder. I find empirical support for my model's predictions.