DP4961 Do Mergers Improve Information? Evidence from the Loan Market

Author(s): Fabio Panetta, Fabiano Schivardi, Matthew Shum
Publication Date: March 2005
Keyword(s): asymmetric information, banking, mergers
JEL(s): G21, L15
Programme Areas: Financial Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4961

We examine the informational effects of M&As by investigating whether bank mergers improve banks? ability to screen borrowers. By exploiting a dataset in which we observe a measure of a borrower?s default risk that the lenders observe only imperfectly, we find evidence of these informational improvements. Mergers lead to a closer correspondence between interest rates and individual default risk: after a merger, risky borrowers experience an increase in the interest rate, while non-risky borrowers enjoy lower interest rates. These informational benefits appear to derive from improvements in information processing resulting from the merger, rather than from explicit information sharing on individual customers among the merging parties. Our evidence suggests that part of these informational improvements stem from the consolidated banks using ?hard? information more intensively.