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Mandatory Disclosure and Takeovers: Evidence from Private Banks

Abstract: We investigate the role of mandatory financial disclosure in the takeover market for privately held U.S. banks. Acquirers rely on public information to identify potential targets and to conduct preliminary due diligence. Thus, publicly available financial information can play a critical role in the identification and assessment of banks as potential targets in M&A deals. Using a difference-in-difference research design around a quasi-exogenous regulatory change in March 2015, which reduced the frequency and granularity of regulatory reporting by banks with less than $1 billion in total consolidated assets, we find that these banks are less likely to be targeted in M&A transactions after March 2015. Further, acquirers earn lower bid-announcement returns when targeting banks with limited mandatory disclosure. However, following the identification of target firms, the time taken to complete the acquisition does not differ significantly between banks above and below the $1 billion asset-size threshold. This finding is consistent with acquirers having access to private information about targets following the signing of confidentiality agreements and/or letters of intent, which reduce their reliance on public financial information. Overall, our study sheds light on the important role of mandatory financial reporting in the takeover market of private firms.