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Differential impact on bank valuation of interstate banking law changes
Journal
of Banking
and
Finance
16 (1992)
Il43-1158.
North-Holland
Differential impact on bank valuation interstate banking law changes Lawrence Uniaersity
Gerald
of
G. Goldberg
of Miami, Coral Gables, FL 33124, USA
A. Hanweck
George Mason Universiry,
and Timothy
F. Sugrue
Fairfax, VA 22030, USA
Received July 1991, final version
received
March
1992
By 1988 forty-seven states and the District of Columbia had enacted legislation liberalizing interstate banking restrictions. This study systematically investigates the market impact of these law changes on bank stock prices. Using an event parameter event study methodology, we assess the differential impact on in-state and out-of-state banks to a given state law change. We also assess the differential impact of law changes upon banks included in, or excluded from, any regional compacts among states. Money center banks are treated as a special class of out-ofstate or excluded banks. We find that out-of-state and out-of-region banks, excluding money center banks, have profited most from these law changes and money center banks have been least positively affected both at the time of enactment and at the effective date of the law changes. We attribute these Endings to the opening of interstate banking opportunities to other than money center and foreign banks, thus ‘leveling the playing geld’.
1. Introduction
Interstate banking opportunities have expanded dramatically in recent years. Forty-seven states and the District of Columbia have enacted legislation permitting bank holding companies headquartered in other states to own banks in those states and the remaining states are expected to follow suit. The recent changes in state laws with respect to interstate banking would be expected to affect the valuation of commercial banks since geographic banking opportunities for banking company expansion have been altered. These effects should vary with the location and nature of banks and the type of state law change. Many states have enacted interstate banking
Correspondence 248094, University
to: Professor Lawrence of Miami, Coral Gables,
0378%4266/92~.SO5.00 C 1992-Elsevier
G. Goldberg, Department FL 33124, USA.
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11-w
L.G. Goldberg
et al., interstate
banking
law changes
legislation which only permit entry by banks from particular states. The intent of this type of legislation has been to exclude the larger, more aggressive money center banks from the state for a period of time, thus allowing regional banks an opportunity to expand to a presumably competitive size. Consequently, liberalization of interstate restrictions should impact regional and money center banks differently. To date no study has systematically analyzed the effect of these legal changes on a wide range of banks, over time, and across the various states passing and adopting liberalized interstate banking legislation. Only one study, Black et al. (1990), has examined the effects of passage of these laws upon commercial bank valuation, but the study only examines the banks within the state which has passed the legislation. It is necessary to also examine the impact upon banks located outside of the state because expansion opportunities can be altered for out-of-state banks. Understanding what has happened because of the new state legislation and providing useful input to policy-makers requires evaluating the effects of the law changes on the valuation of all banks, not merely the ones within the state passing the law. The methodology used in the current study accounts for the aggregate effect of these law changes on all banks for which stock price data can be obtained. This study assesses the effect on bank stock prices of both the passage of state laws expanding interestate banking and the actual enactment of these laws. Even though much interstate expansion of banking services has taken place since the 1970 amendments to the Bank Holding Company (BHC) Act via non-bank subsidiaries of bank holding companies and through loan production offices, these are not effective substitutes for full interstate banking. As a result of liberalizing legislation, much of the interstate expansion has occurred since 1982 and particularly since the 1985 court decision upholding regional interstate banking compacts. Using an expanded ‘event parameter model’ event study methodology, we find that enactment of interstate banking liberalization laws has increased the value of banks in the state or region passing or enacting the legislation. Passage of the laws has had an insignificant effect upon banks within the state but has increased stock values for banks within the region. The effects on banks outside the state or region of both passage and enactment depend upon whether the banks are money center banks or not, as hypothesized. Without exception, there is a less positive effect on the valuation of money center banks from changes in interstate banking laws. The next section of the paper summarizes the legal background and reviews the relevant literature. It also develops hypothesized reactions of banks both within the affected state or region and outside the state or region. The third section of the paper describes the methodology used to evaluate interstate banking law effects. The results are presented in the fourth
L.C. Goldberg
et al., fnrerstate
banking
law changes
1145
section. The final section discusses implications of the empirical findings. 2. Background, literature review and hypotheses Prior to the mid-1960s, banks had little incentive to expand beyond state boundaries. However, changing economic and technological conditions have stimulated commercial banks to reconsider their perceived optimal structural organizations and many of the larger banks have attempted to circumvent the legal restrictions on interstate banking by way of non-banking affiliates of bank holding companies.’ State banks are chartered to operate within a single state. The introduction of national banks in the National Currency Act of 1863 and subsequent legislation and interpretations prohibited branching by national banks. The McFadden Act of 1927 and The Banking Act of 1933 allowed national banks branching opportunities equal to those permitted to state chartered banks. This legislation prohibited, in effect, branching across state lines. Through the bank holding company, commercial banks have been able to circumvent the legal restrictions on interstate branching. Prior to 1956 bank holding companies were unregulated and some banks used this vehicle to establish a multi-state presence. The Bank Holding Act of 1956 prohibited the further establishment of interstate banking offices but grandfathered the seven existing domestic interstate banking organizations. Foreign banking organizations were permitted to establish full banking operations across state lines until the International Banking Act of 1978 attempted to equalize opportunities available for foreign and domestic banks. Though prohibited from expanding full service offices across state lines, interstate foreign banks were allowed to retain existing networks. There are several types of limited service facilities, such as Edge Act Corporations, loan production offices, foreign bank branches and agencies, non-bank banks, and savings and loans,’ which have been permitted on an interstate basis. The Douglas Amendment to the Bank Holding Company Act of 1956 allowed states to pass laws permitting out-of-state bank holding companies to operate banks in those states. Maine was the first state to pass a law of this type in 1978. No other states followed Maine’s lead until 1982 when New York and Alaska enacted liberalized interstate banking legislation. In rapid succession, many states followed so that currently 47 states and the District of Columbia have some variation of law permitting interstate banking through bank holding companies. As of September 1988, assets controlled by banks from other states account for 13.87: of total banking ‘See Goldberg and Hanweck (1988) for a discussion of the legal framework of interstate banking and a detailed description of various exceptions to and means of circumventing interstate banking laws. 2However. the expansion of powers granted S&Ls in the 1980s allowed them powers similar to banks until they were restricted in 1989 with the FIRREA legislation.
J B-E
1146
LG. Goldberg et al., Interstate banking
lawchanges
assets nationwide, with control exceeding 86,,‘/ in Maine and reaching nearly 797; in Washington [King et al. (1989)]. Analysis of the effects of the state laws upon bank valuation must distinguish among the types of state laws and among the types and locations of banks. Some states have tried to attract entry by banks throughout the country by not placing restrictions on interstate banking.j Many states have reciprocity provisions which prohibit entry by banks from states which prohibit interstate banking. Finally, a number of states have combined into regional compacts, permitting entry only by bank holding companies within the region. This type of rufe is intended to deter money center banks from entry into these regions. This method has not been entirely successful as the money center banks have obtained entry into some of the restrictive states through other means such as the acquisition of failing institutions. Many of these restrictions are designed to protect the market value of existing banks in a state such that the effects on bank stock prices might vary by type of state law. As mentioned earlier, Black et al. (1990) examined the effects of passage of interstate banking laws on banks within the state passing the law. Since their sample consisted only of banks traded on the New York and American exchanges, their sample of 51 banks is less than half as large as ours. They make no distinction between states with regional compacts and those without these reciprocal arrangements. Therefore, their results are limited and not directly comparable to those found in the current study. They found a positive and significant effect on regional banking organizations and a negative but insigni~cant effect on money center banks. These results probably reflect more about the likelihood of these banks being acquired in interstate acquisitions rather than of their expansion possibilities as claimed by the authors. Laderman and Pozdena (1991), using pooled time series cross-sectional data, relate quarterly stock returns to changes in the number of source states which have banks that may enter the original state. They find a negative relationship and conclude that interstate banking enhances competition. However, their study can distinguish between types of interstate banking laws but not among categories of banks. The current study is an attempt to make both types of comparisons. Evidence supporting the view that longer term advantages of interstate banking are not necessarily forthcoming to those companies expanding interstate is found in Goldberg and Hanweck (1988). This study examined the performance of the seven grandfathered interstate banking organizations and found them to differ little from their peers. In fact, from 1960 to 1983
‘See Amel(1988)for a discussion of all the interstate and intrastate banking laws.
LG. Goldberg et al., Interstate banking law changes
1147
these organizations experienced a statistically significant decrease in their share of state deposits. This suggests that acquiring organizations would not be expected to gain significant advantages. Unless surviving banking companies can operate more efficiently than the acquired banks, gain scale or scope economies, or reduce risk, an increase in value for surviving banks in the long run is unlikely. Furthermore, potential increases in value may be competed away in the bidding for acquisitions and later by the greater competition for banking services arising from reduced entry barriers made possible by liberalized interstate banking laws. Supporting this contention is a study by Cornett and De (1991) on interstate banking acquisitions which found that acquiring firms have shown increases in value. Banks outside the state experiencing a banking law change would increase in value if interstate expansion were deemed to be a valuable option and would not change if interstate expansion were considered to have no special advantages. If geographical proximity or market extension is important, banks in nearby states should be affected to a greater extent, especially when a regional interstate banking law applies to banks within the affected state. Perhaps the most profound effect of interstate banking law liberalization is to allow smaller regional banks to grow interstate and to become stronger competitors with money center banks. For this reason, the value of money center banks might very well decrease, particularly if they have been systematically excluded by regional compacts. In addition, money center banks might be expected to be less affected by the opportunity for interstate banking expansion for several reasons. First, they have been able to engage in various interstate operations such as mortgage banking and consumer financing since the passage of the amendments to the BHC Act in 1970, so the new powers would not provide as much increase in opportunities as would be provided for smaller banks. Second, a physical presence could be expected to be relatively more important for smaller banks [King et al. (1989)]. The clientele of the different banks is more important for small banks because their major commercial customer base is the medium size regional firm. The customer base of the large money center banks is national and international firms. Third, new interstate operations would constitute a smaller share of a money center bank’s operations and thus would have less of an impact upon firm value. In the empirical analysis, we have separated out-of-state and out-of-region money center banks from other commercial banks in order to uncover the different effects of the laws on these banking companies. We measure reactions to the new state laws in two ways: passage of the law reflecting anticipation of the law’s effect; and enactment of the law representing the realized effect on bank value.’ As detailed below, our results are mostly similar for both sets of dates.
1148
L.G. Goldberg
et al., Interstate
banking
law changes
3. Methodology
To test the complex of hypotheses we considered for this study, we utilize a two-step event parameter model approach. At the heart of this approach is the use of a series of dummy variables which in the first step captures the individual firm’s market reaction to the event in question and, in the second step, is used to discriminate among reactions by each banking firm’s state or regional association. For each bank potentially 70 effects of interstate banking law changes exits - 35 for dates of passage and 35 for dates when the laws became effective (table 1). As discussed above, the effects should differ if the change occurs in the banking firm’s headquarters state or in another state, or as part of a regional interstate banking pact, in a nearby state, or in a remote state. A complication in resolving independent effects is that some of the interstate banking law changes occur at the same time. In these instances, all banks from any affected state is deemed ‘in-state’. This leads to a total of 51 nonredundant event days, with several measuring the reaction to more than one law change.
3.a. Time series analysis The first step in the analysis is to utilize the single index market model to estimate the systematic risk for the sample banking firms over the estimation interval (commencing with 180 days before the first event) and through the event window, and then to estimate the coefftcients for the dummy variables capturing the event day differences. The system of equations estimated by Seemingly Unrelated Regression [Zellner (1962)] is:4 Rj,=Ctj+ajR,,+
f
YjnSnt+8jAR~,+Ejrv
(1)
n=l
where Rj, is the daily return for banking firm j, R,, is the daily market rate of return (the value-weighted index of all returns on either the NYSEiAMEX or NASDAQ, as appropriate),’ AR,, is the first difference of the federal funds rate (Federal Reserve Release H.15), and Smj are 51 dummy variables each representing a five day period (-2 to +2) surrounding the event day in
‘This approach has been used in a number of recent event studies when multiple events must be considered simultaneously [see Ahrony et al. (1986). Thompson (1985). and Binder (1985a. b)]. 5CRSP detines the return on an individual security as r(t) = [p(t)/(t) +d(t)],lp(t’), where p(t) is the close bid/ask average, J(t) is the price adjustment factor (to control for stock splits, etc.) and d(t) is any cash adjustment (such as dividends). The return on the value weighted index, R(f) is defined as: R(I) = [x w.( I)r,( !)]/I w.(f), w h er e w, is security n’s value weight.
)
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1150
L.G. Golrlberg et al.. lnrerstate banking law changes
that state or District of Columbia.6 The coefticients. yj,, are assumed to differ for each bank for passage and effective dates. For each of the overlapping periods, there is no way to distinguish between passage and effective dates in these cases. Note that the coefftcients, yj., are analogous to the individual event prediction errors (PEjl) of other event study approaches and the coefftcients’ r-statistics are equivalent to the Z score of the standardized prediction error (SPE,,).’ To estimate these equations for each banking firm we used daily market return data for all banking firms included on either the CRSP NYSE/AMEX daily return tape or the CRSP NASDAQ daily return tape. This was not a straightforward process since the firm SIC designations on the CRSP tapes are, by CRSP’s own admission, incomplete and unreliable. Consequently, we selected a sample of firms identified as national commercial banks, state commercial banks, commercial banks (other), holding companies and those firms with no specified SIC. Then, on a case-by-case basis, we identified those firms which were in fact banking firms. Through this process, we identified 136 firms which we considered for our sample. In addition to this sample restriction, we deleted those banking firms not having daily return data spanning the entire study period from February 1, 1982 through September 1, 1987.s This would ultimately allow us to test our multiple hypotheses on the same sample of firms. Of the 136 firms, 131 met this latter condition and were thus included in our final sample. Because of the small sample of banks with actively traded stocks, the sample does not include firms from all states passing interstate bank law changes and does not include the first such change by Maine in 1978. However, the sample period includes all other changes in statewide banking laws except for the most recent changes. Unfortunately, to attempt to encompass 1978 would have seriously reduced the sample of banks for little gain in the generalizability of our results. Eq. (1) was then estimated for each of the 131 firms in the sample. The “The change in the daily interest rate on federal funds is included to account for unanticipated changes in interest rates as they affect banking company stock returns. In a number of banking studies, such an unexpected interest rate variable has been found to be important since many banks’ portfolios are interest sensitive [see Ahrony et al. (1986, 198811. Unanticipated increases in interest rates may have a depressing effect on bank market values because of the longer duration of assets than of liabilities for most banking companies. Since most of the observations in our study are after 1985, a period of stable then rising interest rates, inclusion of an anticipated interest rate variable is necessary to control for these effects. For many banks in our sample this variable was not statistically signilicant and had varying signs. the extent of ‘The analogies to simple event studies are based on the ;‘,” coelIicients estimating the shift in return due to the event and thus to values providing the standardized measures of the shift. 8Virtually all states had passed interstate banking legislation by this date. Only Arkansas, Nebraska and New Mexico enacted legislation subsequent to this date. Our analysis does not extend to these event in part because data are available for only one banking lirm among these three states. Only Montana, North Dakota and Kansas still have not passed such legislation.
L.G. Goldberg
et al., Interstate
banking
law changes
1151
total number of observations for each equation was 1,468.9 Of these 131 equations, 90 (66:/,) were significant at the 0.01 level (F> 1.54) and 115 (84%) had positive and significant coefficients for the market return variable. The change in interest rates was positive and significant for 5 banking companies, negative and significant for 11 banking companies, and not statistically significant for 115 companies. These results suggest little systematic effect of unanticipated interest rate changes on banking company stockholder returns. The coefficients for the dummy variables, S,,, were retained for each of the 131 firms and 51 event days.
3.6. Cross-sectional analysis
In the second stage, the 131 by 51 result matrix from the first step was used as an input set for the analysis of differential market reactions. Under study are two differing events - passage and effective dates for legislation and two different types of law effects - those containing regional reciprocal arrangements and those not having these provisions. Table 1 summarizes these reciprocal arrangements. Each of the sample banking firms was identified by the state in which it principally operated and each interstate banking law change was identified with a state and with other states in the region if appropriate. In addition, the banks outside the state of the law change were divided into two groups, non-money center banks and money center banks.” Therefore, for each event, we first categorize the market reactions as belonging to one of three groups - in-state banks, out-of-state banks excluding money center banks, and out-of-state money center banks. Results of r-tests of the corresponding coefficients for each hypothesis are presented in panel 1 of tables 2 and 3.” For all banking law changes containing regional reciprocal arrangements, we categorize firms as belonging to one of four groups: within an affected region (in-region banks); within such a region but outside the state of the law change (in-region, out-of-state banks); non-money center banks outside the region (out-of-region banks, excluding money center banks); and money center banks outside the region
% the event that a firm did not have data in the time frame of the event, that obsevation was omitted and the total was less than 1,468. If a missing value was detected within the time frame of any event. the lirm was removed from the sample. “‘The money center banks were considered to be the following: Bank America, Bank of New York, Bankers Trust NY, Chase Manhattan, Chemical Bank, Citicorp, Continental Illinois, Manufacturers Hanover, Morgan (J.P.), and Wells Fargo. “7 5 percent of the 6,684 dummy variables were statistically significant at the 10 percent level or lower, and for the 131 banking companies in the sample (virtually the entire sample of bank holding companies with actively traded stock) there appear to be no biases among states, regions. or banks.
L.G. Goldberg et al., Interstate banking law changes
1152
Table 2 Cross-sectional
reactions
of bank
stock prices to interstate
Panel I: in-state
Mean (“6) Group I: in-state banks Group II: out-of-state banks (excluding money center banks) Group III: out-of-state banks (monev center banks1
banking
- 0.093
100
0.049
4,022 322
Std (s)
-1.04
0.874
3.59***
0.871
- 1.58’
0.897
and out-of-region. Mean (“,)
Group IV: in-region. in-state banks Group V: in-region, out-of-state banks Group VI: out-of-region banks (excluding money center banks) Group VII: out-of-region banks (money center banks)
r-Statistic
IV
-0.078
Panel 2: in-region
law passclge dates.
and out-of-state.
r-Statistic
N
0.080 0.100
625 558
0.043
2.236
-0.086
219
___-
Std (s)
2.52” 3.08”’
0.795 0.769
2.28”
0.90
- 1.39
I
0.919
*t-Statistic signihcant at the 0.10 level. **t-Statistic signiIicant at the 0.05 level. ***t-Statistic significant at the 0.01 level.
Table Cross-sectional
reactions
3
of bank stock prices to interstate Panel I: in-state
Mean (“J Group I: in-state banks Group II: out-of-state banks (excluding money center banks) Group III: out-of-state banks (money center banks) Panel 2: in-region
*t-Statistic signiIicant at the 0.10 level. **t-Statistic significant at the 0.05 level. ***t-Statistic significant at the 0.01 level
N
0.268
106
0.086
2,443
0.022
202
law ejfectice dates.
t-Statistic
Std (s)
2.72*‘*
1.015
5.018’
0.853
0.3 1
0.99 I
t-Statistic
Std (s)
and out-of-region. Mean (y/J
Group IV: in-region, in-state banks Group V: in-region, out-of-state banks Group VI: out-of-region banks (excluding money center banks) Group VII: out-of-region banks (money center banks)
banking
and out-of-state.
N
0.130 0.133
455 419
3.14*** 3.03”.
0.885 0.899
0.105
1,284
4.40***
0.852
0.068
131
0.81
0.922
L.C. Goldberg
et al., Interstate
banking
I153
law chanqes
Table 4 Test of equivalence
of group means interstate
banking
law passage dates. (A positive coefficient
indicates that the group on the horizontal list had a higher group mean than did the group in the vertical list.) Group
1
Group
Group
II
t= 1.61* df= 104
Group
111
f= 1.68’” df= 167
df=384
II
Group
111
Group
IV
Group
V
Group
VI
t=2.55***
Group
IV
f= 1.99** df= 127
t=0.837 df= 873
t = 2.79**. df=608
Group
V
t = 2.26** df= 128
t= 1.318 df=769
t=3.13*** df=614
t = 0.439 df= 1,173
Group
VI
t = 1.48; df= 109
t=0.258 df = 4,487
t =2.28** df=436
t = 0.930 df= I.1 12
t = 1.37 df=975
Group
VII
I = 0.064 df=201
t=2.23”* df = 240
t=O.OlO df=459
t = 2.55*** df= 339
t = 2.86*** df= 344
t = 2.0288 df=261
Group I: in-state banks. Group II: out-of-state banks, excluding money center banks. Group III: out-of-state money center banks. Group IV: in-region in-state banks. Group V: in-region, out-of-state banks. Group VI: out-of-region banks, excluding money center banks. Group VII: out-of-region money center banks. *t-Statistic significant at the 0.10 level. **t-Statistic significant at the 0.05 level. ***t-Statistic significant at the 0.01 level.
money center banks). I* Similar t-tests were conducted and the results are presented in panel of tables 2 and 3. In order to more carefully compare the changes in stock returns among various banking law changes and bank types, the means of the coefficients of the various groups were tested for equivalence, and these results are reported in tables 4 and 5. An alternative test of the hypotheses, as opposed to using the means of the yjn coefficients, is to place restrictions on these coefficients for each different hypothesis tested [Binder (1985b)]. In the particular case of this study, the number of restrictions would range from 100 in the simplest case to 4,022 in the most complex case. The imposition of such a large number of restrictions was much too complicated and exceeded computer resources available. The testing procedure that is used in this study might be considered a more conservative approach in the sense that the null hypothesis is more likely to be accepted. By treating each y coefficient for each bank and each event as a separate observation, the overall mean is no different
(out-of-region,
“Eleven states passed banking frame of the study.
legislation
which lacked reciprocal
provisions
during the time
L.G. Goldberg
1154
er al.. Inrerstatr
Table
banking law changes
5
Test of equivalence of group means interstate banking law eflecrire dates. (A positive coefficient indicates that the group on the horizontal list had a higher group mean than did the group in the vertical list.) Group
1
Group
II
Group
III
Group
IV
Group
Group
II
t=2.13** df=lll
Group
III
f = 2.05** df = 209
t= 1.01*** df= 226
Group
IV
f = I.408 df= 144
r=l.OO df=621
t= 1.39’ df= 349
Group
V
t = 1.34* df= 149
I = 1.03 df= 555
t = 1.39* df= 364
t = 0.049
Group
VI
t = 1.868’
t = 0.646
t= 1.26
I = 0.532
df=117
df=2,610
df= 250
df= 772
t =0.576 df=680
t = 1.59* df=215
t = 0.234
r=0.425 df= 292
t = 0.699 df= 204
t=0.718 df=213
Group
VII
df= 142
V
Group
VI
df=864
t = 0.469 df= 153
Group I: in-state banks. Group II: out-of-state banks, excluding money center banks. Group III: out-of-state money center banks. Group IV: in-region in-state banks. Group V: in-region, out-of-state banks. Group VI: out-of-region banks, excluding money center banks. Group VII: out-of-region money center banks. *r-Statistic signilicant at the 0.10 level. **t-Statistic signilicant at the 0.05 level. ***t-Statistic signilicant at the 0.01 level.
than the aggregation of these coefficients in the standard event study, excess-returns methodology. The variance of the means is estimated from the variance of the coefficients, treating them as separate observations, and should approximate the variance of the mean of these coefficients for large samples. The various r-statistics presented in tables 2 and 3 are tests with the null hypothesis being a mean of zero or no effect. Other tests, reported in tables 4 and 5, are differences in sample means and any correlation between the coefl’icient means is assumed to be zero.
4. Results The results of our analysis are presented in two sections: first, those related to the passage dates of interstate banking legislation; and second, the results related to the effective dates of these law changes. Overall, our results are remarkably similar across the various groupings with the important differences largely explained by differential interstate banking rules.
L.G. Goldberg
et al., Interstate
banking
law changes
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4.a. Passage dares
Table 2 reports the aggregate reactions to the passage of interstate banking law changes. The in-state banks exhibited a statistically insignificant decrease in value as a result of passage of the laws. The negative sign for this result contradicts our prior hypothesis and differs from the results of Black et a!. (1990) even though money center banks constitute a smaller percentage of our sample than theirs. Apparently the market did not perceive a positive impact of law changes on the over-the-counter banks within the state of passage. Out-of-state banks excluding money center banks increased in value and the change was statistically significant at the one percent level. The out-ofstate money center banks exhibited a decline in the rate of return as a result of the passage of the interstate banking laws, and this reaction was statistically significant at the 10 percent level. The effects of regional reciprocal laws are reported in the second pane! of table 2 and are more consistent with our prior hypotheses. In-region banks increased significantly in value as a result of passage of the laws. Those banks in the region but outside the state increased significantly, indicating that expansion opportunities for them were valuable or that additional banks could now acquire them. Out-of-region banks excluding money center banks increased in value to a statistically significant degree, perhaps indicating future interstate expansion possibilities for them or possibilities of acquisition of them by others when the laws would be further liberalized. Out-of-region money center banks decreased in value but not significantly, once again indicating that interstate banking opportunities are not as valuable for money center banks as for smaller banks. In order to evaluate which groups of banking companies benefited or suffered more from interstate banking law changes, tests for differences in group means are conducted and presented in table 4 for passage dates. In this table and table 5, the differences in mean values are the mean for the group in the column less the mean for the group in the row. These statistics demonstrate that group I, in-state banks, have statistically the lowest return (greatest decline in return) of any other group with the exception of out-ofregion money center banks. An additional generalization is that money center banks (Group III and Group VII) have uniformly had the worst performance as a result of passage of interstate banking legislation. These results are even more revealing than those of table 2 because they demonstrate more dramatically that in-state and money center banks have fared poorly as a result of the liberalization of interstate banking. The banking companies benefited most by increased rate of return are in-region, out-ofstate banks (Group V) and, though to a lesser extent, in-region, in-state banks (Group IV). Clearly then, banks within regions defined by regional
L.G. Goldberg et al., Interstate
1156
banking law changes
compacts fared better than all other types of banking companies passage of this legislation. 4.6. Effective
from the
dates
The results in table 3 indicate the reactions to the interstate banking laws becoming effective. Note that there is more consistency for these than for the passage date. From panel 1, both in-state banks and out-of-state banks, excluding money center banks, exhibited statistically significant increases in market returns. As hypothesized, potential acquired and acquiring banks increased in value with liberalized interstate banking laws, but out-of-state money center banks are not affected significantly. The results are very similar for the regional reciprocal laws as presented in panel 2 of table 3. The in-region banks (Group IV) and out-of-state banks (Group V), and the out-of-region banks excluding money center banks (Group VI) all increased in value significantly at the one percent level. Outof-region money center banks increased in value, but to a lesser extent which was not statistically significant. The evidence suggests that implementation of regional reciprocal laws increases the value of all banks, on average, except for money center banks. The interpretation is similar to that discussed earlier with respect to passage of these laws. The tests for equivalence of group means are reported in table 5 and differ dramatically from the equivalence tests for passage dates. Only Group 1 and Group III have means which differ significantly - in-state banks exhibit greater returns than out-of-state and money center banks. This indicates that banks are more uniformly affected by the effective imposition of the laws than by passage. Since more anticipatory affects arise as a result of passage of these laws, these results of greater uniformity for effective dates are to be expected. 5. Conclusions
This study has statistically examined the differential market impact of liberalizing interstate banking laws. Though the analysis is complex, with 35 state law changes being considered simultaneously, the results give clear evidence of a distinctive pattern of market value changes. Most notably, the money center banks have not benefited to the degree other banks have. In summary, these results show that in-state and in-region banks benefited from the enactment of liberalized interstate banking laws that has taken place since 1982. Passage of the laws benefited in-region banks but had no significant effect on in-state banks, probably because of a degree of uncertainty. Both the increase in the number of potential acquiring firms and the added expansion opportunities for these banks would be expected to increase
L.G. Goldberg
et al., Intersrate
banking
law changes
1157
their value. This has apparently outweighed the negative impact on value of increased competition. Except for money center banks, out-of-state and outof-region banks appear also to have benefited from passage and imposition of liberalized interstate banking laws. This can be due to increased expansion opportunities and to triggering of reciprocity provisions which may increase the potential acquirers of the out-of-state banks. However, the recent deterioration of the profitability of the ‘super-regionals’ may change the perception of the value of interstate activities. Because money center banks already have some interstate operations and the new opportunities as a result of the legal changes do not represent a relatively large part of their business, they do not appear to be positively affected by the liberalization of interstate banking. These results indicate that banks are generally positively affected by the passage and effective imposition of interstate banking laws. Only money center banks which are not in the state or region in most cases are not on average favorably affected by changes in the laws. Stigler’s (1971) proposition that regulation is demanded by the regulated and supervised by regulators for the benefit of the regulated is supported by our results from interstate banking. His capture theory of regulation suggests that a state will liberalize its interstate banking regulations only if such actions would benefit the regulated banks in its state. These laws apparently have benefited the banks within the states in the 1980s and thus it is not surprising that a large proportion of the states have enacted such laws. Since a number of states enacted interstate banking legislation with an explicit focus on deterring entry by money center banks, it is not surprising to find that these banks have not benefited from this legislation. Passage of these laws may have been aided by the fact that many out-of-state banks can also expect to benefit from their passage and effect imposition. The liberalization of interstate banking laws has appeared to benefit those who are regulated. We might expect that the regulated banks in the future will successfully call for further changes in laws which will benefit them, perhaps even for the deregulation of interstate branching and the further expansion of banking powers.
References Amel. D., 1988, State laws affecting commercial bank branching, multibank holding company expansion, and interstate banking, Mimeo. Board of Governors of the Federal Reserve System. Ahrony, J.. A. Saunders and 1. Swary, 1986, The effects in monetary policy regime of the profitability and risk of commercial banks, Journal of Monetary Economics 17, 363-377. Ahrony, J., A. Saunders and 1. Swary. 1988, The eNects of DIDMCA on bank stockholders’ returns and risk, Journal of Banking and Finance 12, 317-331. Binder. J., 1985a. Measuring the effects of regulation with stock price data, Rand Journal of Economics 16, 167-183.
1158
L.C. Goldberg et al., Interstate banking law changes
Binder, J., 1985b, On the use of the multivariate regression model in event studies. Journal of Accounting Research 23, 370-383. Black, H., M. Fields and R. Schweitzer, 1990, Changes in interstate banking laws: The impact on shareholder wealth, Journal of Finance 45, 1663-1671. Board of Governors of the Federal Reserve System, various dates, Selected interest rates, Statistical Release H.15. Cornett, M.M. and S. De. 1991, Common stock returns in corporate takeover bids: Evidence from interstate bank mergers, Journal of Banking and Finance 15. 273-295. Goldberg, L. and G. Hanweck, 1988, What can we expect from interstate banking, Journal of Banking and Finance 12, 51-67. King, B.F., S.L. Tschinkel and D. Whitehead. 1989, Interstate banking developments in the 1980s. Economic Review, Federal Reserve Bank of Atlanta, 32-51. Laderman, ES. and R.J. Pozdena, 1991, Interstate banking and competition: Evidence from the behavior of stock returns, Economic Review, Federal Reserve Bank of San Francisco, Spring, 3247. Stigler, G.J., 1971, The theory of economic regulation, Bell Journal of Economics and Management Science 2, Spring, 321. Thompson, R., 1985, Conditioning the return generating process on firm specific events: A discussion of event study methods, Journal of Financial and Quantitative Analysis 20, June, 151-186. Zellner, A., 1962, An eflicient method of estimating seemingly unrelated regression and tests for aggregation bias, Journal of the American Statistical Association 57, June, 348-368.
of Banking
and
Finance
16 (1992)
Il43-1158.
North-Holland
Differential impact on bank valuation interstate banking law changes Lawrence Uniaersity
Gerald
of
G. Goldberg
of Miami, Coral Gables, FL 33124, USA
A. Hanweck
George Mason Universiry,
and Timothy
F. Sugrue
Fairfax, VA 22030, USA
Received July 1991, final version
received
March
1992
By 1988 forty-seven states and the District of Columbia had enacted legislation liberalizing interstate banking restrictions. This study systematically investigates the market impact of these law changes on bank stock prices. Using an event parameter event study methodology, we assess the differential impact on in-state and out-of-state banks to a given state law change. We also assess the differential impact of law changes upon banks included in, or excluded from, any regional compacts among states. Money center banks are treated as a special class of out-ofstate or excluded banks. We find that out-of-state and out-of-region banks, excluding money center banks, have profited most from these law changes and money center banks have been least positively affected both at the time of enactment and at the effective date of the law changes. We attribute these Endings to the opening of interstate banking opportunities to other than money center and foreign banks, thus ‘leveling the playing geld’.
1. Introduction
Interstate banking opportunities have expanded dramatically in recent years. Forty-seven states and the District of Columbia have enacted legislation permitting bank holding companies headquartered in other states to own banks in those states and the remaining states are expected to follow suit. The recent changes in state laws with respect to interstate banking would be expected to affect the valuation of commercial banks since geographic banking opportunities for banking company expansion have been altered. These effects should vary with the location and nature of banks and the type of state law change. Many states have enacted interstate banking
Correspondence 248094, University
to: Professor Lawrence of Miami, Coral Gables,
0378%4266/92~.SO5.00 C 1992-Elsevier
G. Goldberg, Department FL 33124, USA.
Science
Publishers
of Finance,
B.V. All rights reserved
P.O.
Box
11-w
L.G. Goldberg
et al., interstate
banking
law changes
legislation which only permit entry by banks from particular states. The intent of this type of legislation has been to exclude the larger, more aggressive money center banks from the state for a period of time, thus allowing regional banks an opportunity to expand to a presumably competitive size. Consequently, liberalization of interstate restrictions should impact regional and money center banks differently. To date no study has systematically analyzed the effect of these legal changes on a wide range of banks, over time, and across the various states passing and adopting liberalized interstate banking legislation. Only one study, Black et al. (1990), has examined the effects of passage of these laws upon commercial bank valuation, but the study only examines the banks within the state which has passed the legislation. It is necessary to also examine the impact upon banks located outside of the state because expansion opportunities can be altered for out-of-state banks. Understanding what has happened because of the new state legislation and providing useful input to policy-makers requires evaluating the effects of the law changes on the valuation of all banks, not merely the ones within the state passing the law. The methodology used in the current study accounts for the aggregate effect of these law changes on all banks for which stock price data can be obtained. This study assesses the effect on bank stock prices of both the passage of state laws expanding interestate banking and the actual enactment of these laws. Even though much interstate expansion of banking services has taken place since the 1970 amendments to the Bank Holding Company (BHC) Act via non-bank subsidiaries of bank holding companies and through loan production offices, these are not effective substitutes for full interstate banking. As a result of liberalizing legislation, much of the interstate expansion has occurred since 1982 and particularly since the 1985 court decision upholding regional interstate banking compacts. Using an expanded ‘event parameter model’ event study methodology, we find that enactment of interstate banking liberalization laws has increased the value of banks in the state or region passing or enacting the legislation. Passage of the laws has had an insignificant effect upon banks within the state but has increased stock values for banks within the region. The effects on banks outside the state or region of both passage and enactment depend upon whether the banks are money center banks or not, as hypothesized. Without exception, there is a less positive effect on the valuation of money center banks from changes in interstate banking laws. The next section of the paper summarizes the legal background and reviews the relevant literature. It also develops hypothesized reactions of banks both within the affected state or region and outside the state or region. The third section of the paper describes the methodology used to evaluate interstate banking law effects. The results are presented in the fourth
L.C. Goldberg
et al., fnrerstate
banking
law changes
1145
section. The final section discusses implications of the empirical findings. 2. Background, literature review and hypotheses Prior to the mid-1960s, banks had little incentive to expand beyond state boundaries. However, changing economic and technological conditions have stimulated commercial banks to reconsider their perceived optimal structural organizations and many of the larger banks have attempted to circumvent the legal restrictions on interstate banking by way of non-banking affiliates of bank holding companies.’ State banks are chartered to operate within a single state. The introduction of national banks in the National Currency Act of 1863 and subsequent legislation and interpretations prohibited branching by national banks. The McFadden Act of 1927 and The Banking Act of 1933 allowed national banks branching opportunities equal to those permitted to state chartered banks. This legislation prohibited, in effect, branching across state lines. Through the bank holding company, commercial banks have been able to circumvent the legal restrictions on interstate branching. Prior to 1956 bank holding companies were unregulated and some banks used this vehicle to establish a multi-state presence. The Bank Holding Act of 1956 prohibited the further establishment of interstate banking offices but grandfathered the seven existing domestic interstate banking organizations. Foreign banking organizations were permitted to establish full banking operations across state lines until the International Banking Act of 1978 attempted to equalize opportunities available for foreign and domestic banks. Though prohibited from expanding full service offices across state lines, interstate foreign banks were allowed to retain existing networks. There are several types of limited service facilities, such as Edge Act Corporations, loan production offices, foreign bank branches and agencies, non-bank banks, and savings and loans,’ which have been permitted on an interstate basis. The Douglas Amendment to the Bank Holding Company Act of 1956 allowed states to pass laws permitting out-of-state bank holding companies to operate banks in those states. Maine was the first state to pass a law of this type in 1978. No other states followed Maine’s lead until 1982 when New York and Alaska enacted liberalized interstate banking legislation. In rapid succession, many states followed so that currently 47 states and the District of Columbia have some variation of law permitting interstate banking through bank holding companies. As of September 1988, assets controlled by banks from other states account for 13.87: of total banking ‘See Goldberg and Hanweck (1988) for a discussion of the legal framework of interstate banking and a detailed description of various exceptions to and means of circumventing interstate banking laws. 2However. the expansion of powers granted S&Ls in the 1980s allowed them powers similar to banks until they were restricted in 1989 with the FIRREA legislation.
J B-E
1146
LG. Goldberg et al., Interstate banking
lawchanges
assets nationwide, with control exceeding 86,,‘/ in Maine and reaching nearly 797; in Washington [King et al. (1989)]. Analysis of the effects of the state laws upon bank valuation must distinguish among the types of state laws and among the types and locations of banks. Some states have tried to attract entry by banks throughout the country by not placing restrictions on interstate banking.j Many states have reciprocity provisions which prohibit entry by banks from states which prohibit interstate banking. Finally, a number of states have combined into regional compacts, permitting entry only by bank holding companies within the region. This type of rufe is intended to deter money center banks from entry into these regions. This method has not been entirely successful as the money center banks have obtained entry into some of the restrictive states through other means such as the acquisition of failing institutions. Many of these restrictions are designed to protect the market value of existing banks in a state such that the effects on bank stock prices might vary by type of state law. As mentioned earlier, Black et al. (1990) examined the effects of passage of interstate banking laws on banks within the state passing the law. Since their sample consisted only of banks traded on the New York and American exchanges, their sample of 51 banks is less than half as large as ours. They make no distinction between states with regional compacts and those without these reciprocal arrangements. Therefore, their results are limited and not directly comparable to those found in the current study. They found a positive and significant effect on regional banking organizations and a negative but insigni~cant effect on money center banks. These results probably reflect more about the likelihood of these banks being acquired in interstate acquisitions rather than of their expansion possibilities as claimed by the authors. Laderman and Pozdena (1991), using pooled time series cross-sectional data, relate quarterly stock returns to changes in the number of source states which have banks that may enter the original state. They find a negative relationship and conclude that interstate banking enhances competition. However, their study can distinguish between types of interstate banking laws but not among categories of banks. The current study is an attempt to make both types of comparisons. Evidence supporting the view that longer term advantages of interstate banking are not necessarily forthcoming to those companies expanding interstate is found in Goldberg and Hanweck (1988). This study examined the performance of the seven grandfathered interstate banking organizations and found them to differ little from their peers. In fact, from 1960 to 1983
‘See Amel(1988)for a discussion of all the interstate and intrastate banking laws.
LG. Goldberg et al., Interstate banking law changes
1147
these organizations experienced a statistically significant decrease in their share of state deposits. This suggests that acquiring organizations would not be expected to gain significant advantages. Unless surviving banking companies can operate more efficiently than the acquired banks, gain scale or scope economies, or reduce risk, an increase in value for surviving banks in the long run is unlikely. Furthermore, potential increases in value may be competed away in the bidding for acquisitions and later by the greater competition for banking services arising from reduced entry barriers made possible by liberalized interstate banking laws. Supporting this contention is a study by Cornett and De (1991) on interstate banking acquisitions which found that acquiring firms have shown increases in value. Banks outside the state experiencing a banking law change would increase in value if interstate expansion were deemed to be a valuable option and would not change if interstate expansion were considered to have no special advantages. If geographical proximity or market extension is important, banks in nearby states should be affected to a greater extent, especially when a regional interstate banking law applies to banks within the affected state. Perhaps the most profound effect of interstate banking law liberalization is to allow smaller regional banks to grow interstate and to become stronger competitors with money center banks. For this reason, the value of money center banks might very well decrease, particularly if they have been systematically excluded by regional compacts. In addition, money center banks might be expected to be less affected by the opportunity for interstate banking expansion for several reasons. First, they have been able to engage in various interstate operations such as mortgage banking and consumer financing since the passage of the amendments to the BHC Act in 1970, so the new powers would not provide as much increase in opportunities as would be provided for smaller banks. Second, a physical presence could be expected to be relatively more important for smaller banks [King et al. (1989)]. The clientele of the different banks is more important for small banks because their major commercial customer base is the medium size regional firm. The customer base of the large money center banks is national and international firms. Third, new interstate operations would constitute a smaller share of a money center bank’s operations and thus would have less of an impact upon firm value. In the empirical analysis, we have separated out-of-state and out-of-region money center banks from other commercial banks in order to uncover the different effects of the laws on these banking companies. We measure reactions to the new state laws in two ways: passage of the law reflecting anticipation of the law’s effect; and enactment of the law representing the realized effect on bank value.’ As detailed below, our results are mostly similar for both sets of dates.
1148
L.G. Goldberg
et al., Interstate
banking
law changes
3. Methodology
To test the complex of hypotheses we considered for this study, we utilize a two-step event parameter model approach. At the heart of this approach is the use of a series of dummy variables which in the first step captures the individual firm’s market reaction to the event in question and, in the second step, is used to discriminate among reactions by each banking firm’s state or regional association. For each bank potentially 70 effects of interstate banking law changes exits - 35 for dates of passage and 35 for dates when the laws became effective (table 1). As discussed above, the effects should differ if the change occurs in the banking firm’s headquarters state or in another state, or as part of a regional interstate banking pact, in a nearby state, or in a remote state. A complication in resolving independent effects is that some of the interstate banking law changes occur at the same time. In these instances, all banks from any affected state is deemed ‘in-state’. This leads to a total of 51 nonredundant event days, with several measuring the reaction to more than one law change.
3.a. Time series analysis The first step in the analysis is to utilize the single index market model to estimate the systematic risk for the sample banking firms over the estimation interval (commencing with 180 days before the first event) and through the event window, and then to estimate the coefftcients for the dummy variables capturing the event day differences. The system of equations estimated by Seemingly Unrelated Regression [Zellner (1962)] is:4 Rj,=Ctj+ajR,,+
f
YjnSnt+8jAR~,+Ejrv
(1)
n=l
where Rj, is the daily return for banking firm j, R,, is the daily market rate of return (the value-weighted index of all returns on either the NYSEiAMEX or NASDAQ, as appropriate),’ AR,, is the first difference of the federal funds rate (Federal Reserve Release H.15), and Smj are 51 dummy variables each representing a five day period (-2 to +2) surrounding the event day in
‘This approach has been used in a number of recent event studies when multiple events must be considered simultaneously [see Ahrony et al. (1986). Thompson (1985). and Binder (1985a. b)]. 5CRSP detines the return on an individual security as r(t) = [p(t)/(t) +d(t)],lp(t’), where p(t) is the close bid/ask average, J(t) is the price adjustment factor (to control for stock splits, etc.) and d(t) is any cash adjustment (such as dividends). The return on the value weighted index, R(f) is defined as: R(I) = [x w.( I)r,( !)]/I w.(f), w h er e w, is security n’s value weight.
)
X X
xxxx
X
X
xxxx
X
xx
xxxx
X
xx
x X
xxx X
xx
X X
xxx
xx
X
X
X
X
X
X
I /
x x
x
X
x
x xx X X
x x
XX
x x
xx x
X
X
x
X X
X
xx X
X
x x
XXX
X
X
x
X
x
X
X X
X
X
X
X XXX
X
XX
xx
xx xxx x
X
x
xx
x
X
x
X
XX
xxx
X
X X X
X
X
X
X
X
xx
X
X
xxx
X X
x
x
X
X
x
x
x
X
X
X
x
x
X
xxx
X
xxx xxx
X X
xx X X
xxx
X X
X
xxx X
x
X
X X
xx
X X X
x
x
X
1150
L.G. Golrlberg et al.. lnrerstate banking law changes
that state or District of Columbia.6 The coefticients. yj,, are assumed to differ for each bank for passage and effective dates. For each of the overlapping periods, there is no way to distinguish between passage and effective dates in these cases. Note that the coefftcients, yj., are analogous to the individual event prediction errors (PEjl) of other event study approaches and the coefftcients’ r-statistics are equivalent to the Z score of the standardized prediction error (SPE,,).’ To estimate these equations for each banking firm we used daily market return data for all banking firms included on either the CRSP NYSE/AMEX daily return tape or the CRSP NASDAQ daily return tape. This was not a straightforward process since the firm SIC designations on the CRSP tapes are, by CRSP’s own admission, incomplete and unreliable. Consequently, we selected a sample of firms identified as national commercial banks, state commercial banks, commercial banks (other), holding companies and those firms with no specified SIC. Then, on a case-by-case basis, we identified those firms which were in fact banking firms. Through this process, we identified 136 firms which we considered for our sample. In addition to this sample restriction, we deleted those banking firms not having daily return data spanning the entire study period from February 1, 1982 through September 1, 1987.s This would ultimately allow us to test our multiple hypotheses on the same sample of firms. Of the 136 firms, 131 met this latter condition and were thus included in our final sample. Because of the small sample of banks with actively traded stocks, the sample does not include firms from all states passing interstate bank law changes and does not include the first such change by Maine in 1978. However, the sample period includes all other changes in statewide banking laws except for the most recent changes. Unfortunately, to attempt to encompass 1978 would have seriously reduced the sample of banks for little gain in the generalizability of our results. Eq. (1) was then estimated for each of the 131 firms in the sample. The “The change in the daily interest rate on federal funds is included to account for unanticipated changes in interest rates as they affect banking company stock returns. In a number of banking studies, such an unexpected interest rate variable has been found to be important since many banks’ portfolios are interest sensitive [see Ahrony et al. (1986, 198811. Unanticipated increases in interest rates may have a depressing effect on bank market values because of the longer duration of assets than of liabilities for most banking companies. Since most of the observations in our study are after 1985, a period of stable then rising interest rates, inclusion of an anticipated interest rate variable is necessary to control for these effects. For many banks in our sample this variable was not statistically signilicant and had varying signs. the extent of ‘The analogies to simple event studies are based on the ;‘,” coelIicients estimating the shift in return due to the event and thus to values providing the standardized measures of the shift. 8Virtually all states had passed interstate banking legislation by this date. Only Arkansas, Nebraska and New Mexico enacted legislation subsequent to this date. Our analysis does not extend to these event in part because data are available for only one banking lirm among these three states. Only Montana, North Dakota and Kansas still have not passed such legislation.
L.G. Goldberg
et al., Interstate
banking
law changes
1151
total number of observations for each equation was 1,468.9 Of these 131 equations, 90 (66:/,) were significant at the 0.01 level (F> 1.54) and 115 (84%) had positive and significant coefficients for the market return variable. The change in interest rates was positive and significant for 5 banking companies, negative and significant for 11 banking companies, and not statistically significant for 115 companies. These results suggest little systematic effect of unanticipated interest rate changes on banking company stockholder returns. The coefficients for the dummy variables, S,,, were retained for each of the 131 firms and 51 event days.
3.6. Cross-sectional analysis
In the second stage, the 131 by 51 result matrix from the first step was used as an input set for the analysis of differential market reactions. Under study are two differing events - passage and effective dates for legislation and two different types of law effects - those containing regional reciprocal arrangements and those not having these provisions. Table 1 summarizes these reciprocal arrangements. Each of the sample banking firms was identified by the state in which it principally operated and each interstate banking law change was identified with a state and with other states in the region if appropriate. In addition, the banks outside the state of the law change were divided into two groups, non-money center banks and money center banks.” Therefore, for each event, we first categorize the market reactions as belonging to one of three groups - in-state banks, out-of-state banks excluding money center banks, and out-of-state money center banks. Results of r-tests of the corresponding coefficients for each hypothesis are presented in panel 1 of tables 2 and 3.” For all banking law changes containing regional reciprocal arrangements, we categorize firms as belonging to one of four groups: within an affected region (in-region banks); within such a region but outside the state of the law change (in-region, out-of-state banks); non-money center banks outside the region (out-of-region banks, excluding money center banks); and money center banks outside the region
% the event that a firm did not have data in the time frame of the event, that obsevation was omitted and the total was less than 1,468. If a missing value was detected within the time frame of any event. the lirm was removed from the sample. “‘The money center banks were considered to be the following: Bank America, Bank of New York, Bankers Trust NY, Chase Manhattan, Chemical Bank, Citicorp, Continental Illinois, Manufacturers Hanover, Morgan (J.P.), and Wells Fargo. “7 5 percent of the 6,684 dummy variables were statistically significant at the 10 percent level or lower, and for the 131 banking companies in the sample (virtually the entire sample of bank holding companies with actively traded stock) there appear to be no biases among states, regions. or banks.
L.G. Goldberg et al., Interstate banking law changes
1152
Table 2 Cross-sectional
reactions
of bank
stock prices to interstate
Panel I: in-state
Mean (“6) Group I: in-state banks Group II: out-of-state banks (excluding money center banks) Group III: out-of-state banks (monev center banks1
banking
- 0.093
100
0.049
4,022 322
Std (s)
-1.04
0.874
3.59***
0.871
- 1.58’
0.897
and out-of-region. Mean (“,)
Group IV: in-region. in-state banks Group V: in-region, out-of-state banks Group VI: out-of-region banks (excluding money center banks) Group VII: out-of-region banks (money center banks)
r-Statistic
IV
-0.078
Panel 2: in-region
law passclge dates.
and out-of-state.
r-Statistic
N
0.080 0.100
625 558
0.043
2.236
-0.086
219
___-
Std (s)
2.52” 3.08”’
0.795 0.769
2.28”
0.90
- 1.39
I
0.919
*t-Statistic signihcant at the 0.10 level. **t-Statistic signiIicant at the 0.05 level. ***t-Statistic significant at the 0.01 level.
Table Cross-sectional
reactions
3
of bank stock prices to interstate Panel I: in-state
Mean (“J Group I: in-state banks Group II: out-of-state banks (excluding money center banks) Group III: out-of-state banks (money center banks) Panel 2: in-region
*t-Statistic signiIicant at the 0.10 level. **t-Statistic significant at the 0.05 level. ***t-Statistic significant at the 0.01 level
N
0.268
106
0.086
2,443
0.022
202
law ejfectice dates.
t-Statistic
Std (s)
2.72*‘*
1.015
5.018’
0.853
0.3 1
0.99 I
t-Statistic
Std (s)
and out-of-region. Mean (y/J
Group IV: in-region, in-state banks Group V: in-region, out-of-state banks Group VI: out-of-region banks (excluding money center banks) Group VII: out-of-region banks (money center banks)
banking
and out-of-state.
N
0.130 0.133
455 419
3.14*** 3.03”.
0.885 0.899
0.105
1,284
4.40***
0.852
0.068
131
0.81
0.922
L.C. Goldberg
et al., Interstate
banking
I153
law chanqes
Table 4 Test of equivalence
of group means interstate
banking
law passage dates. (A positive coefficient
indicates that the group on the horizontal list had a higher group mean than did the group in the vertical list.) Group
1
Group
Group
II
t= 1.61* df= 104
Group
111
f= 1.68’” df= 167
df=384
II
Group
111
Group
IV
Group
V
Group
VI
t=2.55***
Group
IV
f= 1.99** df= 127
t=0.837 df= 873
t = 2.79**. df=608
Group
V
t = 2.26** df= 128
t= 1.318 df=769
t=3.13*** df=614
t = 0.439 df= 1,173
Group
VI
t = 1.48; df= 109
t=0.258 df = 4,487
t =2.28** df=436
t = 0.930 df= I.1 12
t = 1.37 df=975
Group
VII
I = 0.064 df=201
t=2.23”* df = 240
t=O.OlO df=459
t = 2.55*** df= 339
t = 2.86*** df= 344
t = 2.0288 df=261
Group I: in-state banks. Group II: out-of-state banks, excluding money center banks. Group III: out-of-state money center banks. Group IV: in-region in-state banks. Group V: in-region, out-of-state banks. Group VI: out-of-region banks, excluding money center banks. Group VII: out-of-region money center banks. *t-Statistic significant at the 0.10 level. **t-Statistic significant at the 0.05 level. ***t-Statistic significant at the 0.01 level.
money center banks). I* Similar t-tests were conducted and the results are presented in panel of tables 2 and 3. In order to more carefully compare the changes in stock returns among various banking law changes and bank types, the means of the coefficients of the various groups were tested for equivalence, and these results are reported in tables 4 and 5. An alternative test of the hypotheses, as opposed to using the means of the yjn coefficients, is to place restrictions on these coefficients for each different hypothesis tested [Binder (1985b)]. In the particular case of this study, the number of restrictions would range from 100 in the simplest case to 4,022 in the most complex case. The imposition of such a large number of restrictions was much too complicated and exceeded computer resources available. The testing procedure that is used in this study might be considered a more conservative approach in the sense that the null hypothesis is more likely to be accepted. By treating each y coefficient for each bank and each event as a separate observation, the overall mean is no different
(out-of-region,
“Eleven states passed banking frame of the study.
legislation
which lacked reciprocal
provisions
during the time
L.G. Goldberg
1154
er al.. Inrerstatr
Table
banking law changes
5
Test of equivalence of group means interstate banking law eflecrire dates. (A positive coefficient indicates that the group on the horizontal list had a higher group mean than did the group in the vertical list.) Group
1
Group
II
Group
III
Group
IV
Group
Group
II
t=2.13** df=lll
Group
III
f = 2.05** df = 209
t= 1.01*** df= 226
Group
IV
f = I.408 df= 144
r=l.OO df=621
t= 1.39’ df= 349
Group
V
t = 1.34* df= 149
I = 1.03 df= 555
t = 1.39* df= 364
t = 0.049
Group
VI
t = 1.868’
t = 0.646
t= 1.26
I = 0.532
df=117
df=2,610
df= 250
df= 772
t =0.576 df=680
t = 1.59* df=215
t = 0.234
r=0.425 df= 292
t = 0.699 df= 204
t=0.718 df=213
Group
VII
df= 142
V
Group
VI
df=864
t = 0.469 df= 153
Group I: in-state banks. Group II: out-of-state banks, excluding money center banks. Group III: out-of-state money center banks. Group IV: in-region in-state banks. Group V: in-region, out-of-state banks. Group VI: out-of-region banks, excluding money center banks. Group VII: out-of-region money center banks. *r-Statistic signilicant at the 0.10 level. **t-Statistic signilicant at the 0.05 level. ***t-Statistic signilicant at the 0.01 level.
than the aggregation of these coefficients in the standard event study, excess-returns methodology. The variance of the means is estimated from the variance of the coefficients, treating them as separate observations, and should approximate the variance of the mean of these coefficients for large samples. The various r-statistics presented in tables 2 and 3 are tests with the null hypothesis being a mean of zero or no effect. Other tests, reported in tables 4 and 5, are differences in sample means and any correlation between the coefl’icient means is assumed to be zero.
4. Results The results of our analysis are presented in two sections: first, those related to the passage dates of interstate banking legislation; and second, the results related to the effective dates of these law changes. Overall, our results are remarkably similar across the various groupings with the important differences largely explained by differential interstate banking rules.
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4.a. Passage dares
Table 2 reports the aggregate reactions to the passage of interstate banking law changes. The in-state banks exhibited a statistically insignificant decrease in value as a result of passage of the laws. The negative sign for this result contradicts our prior hypothesis and differs from the results of Black et a!. (1990) even though money center banks constitute a smaller percentage of our sample than theirs. Apparently the market did not perceive a positive impact of law changes on the over-the-counter banks within the state of passage. Out-of-state banks excluding money center banks increased in value and the change was statistically significant at the one percent level. The out-ofstate money center banks exhibited a decline in the rate of return as a result of the passage of the interstate banking laws, and this reaction was statistically significant at the 10 percent level. The effects of regional reciprocal laws are reported in the second pane! of table 2 and are more consistent with our prior hypotheses. In-region banks increased significantly in value as a result of passage of the laws. Those banks in the region but outside the state increased significantly, indicating that expansion opportunities for them were valuable or that additional banks could now acquire them. Out-of-region banks excluding money center banks increased in value to a statistically significant degree, perhaps indicating future interstate expansion possibilities for them or possibilities of acquisition of them by others when the laws would be further liberalized. Out-of-region money center banks decreased in value but not significantly, once again indicating that interstate banking opportunities are not as valuable for money center banks as for smaller banks. In order to evaluate which groups of banking companies benefited or suffered more from interstate banking law changes, tests for differences in group means are conducted and presented in table 4 for passage dates. In this table and table 5, the differences in mean values are the mean for the group in the column less the mean for the group in the row. These statistics demonstrate that group I, in-state banks, have statistically the lowest return (greatest decline in return) of any other group with the exception of out-ofregion money center banks. An additional generalization is that money center banks (Group III and Group VII) have uniformly had the worst performance as a result of passage of interstate banking legislation. These results are even more revealing than those of table 2 because they demonstrate more dramatically that in-state and money center banks have fared poorly as a result of the liberalization of interstate banking. The banking companies benefited most by increased rate of return are in-region, out-ofstate banks (Group V) and, though to a lesser extent, in-region, in-state banks (Group IV). Clearly then, banks within regions defined by regional
L.G. Goldberg et al., Interstate
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banking law changes
compacts fared better than all other types of banking companies passage of this legislation. 4.6. Effective
from the
dates
The results in table 3 indicate the reactions to the interstate banking laws becoming effective. Note that there is more consistency for these than for the passage date. From panel 1, both in-state banks and out-of-state banks, excluding money center banks, exhibited statistically significant increases in market returns. As hypothesized, potential acquired and acquiring banks increased in value with liberalized interstate banking laws, but out-of-state money center banks are not affected significantly. The results are very similar for the regional reciprocal laws as presented in panel 2 of table 3. The in-region banks (Group IV) and out-of-state banks (Group V), and the out-of-region banks excluding money center banks (Group VI) all increased in value significantly at the one percent level. Outof-region money center banks increased in value, but to a lesser extent which was not statistically significant. The evidence suggests that implementation of regional reciprocal laws increases the value of all banks, on average, except for money center banks. The interpretation is similar to that discussed earlier with respect to passage of these laws. The tests for equivalence of group means are reported in table 5 and differ dramatically from the equivalence tests for passage dates. Only Group 1 and Group III have means which differ significantly - in-state banks exhibit greater returns than out-of-state and money center banks. This indicates that banks are more uniformly affected by the effective imposition of the laws than by passage. Since more anticipatory affects arise as a result of passage of these laws, these results of greater uniformity for effective dates are to be expected. 5. Conclusions
This study has statistically examined the differential market impact of liberalizing interstate banking laws. Though the analysis is complex, with 35 state law changes being considered simultaneously, the results give clear evidence of a distinctive pattern of market value changes. Most notably, the money center banks have not benefited to the degree other banks have. In summary, these results show that in-state and in-region banks benefited from the enactment of liberalized interstate banking laws that has taken place since 1982. Passage of the laws benefited in-region banks but had no significant effect on in-state banks, probably because of a degree of uncertainty. Both the increase in the number of potential acquiring firms and the added expansion opportunities for these banks would be expected to increase
L.G. Goldberg
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their value. This has apparently outweighed the negative impact on value of increased competition. Except for money center banks, out-of-state and outof-region banks appear also to have benefited from passage and imposition of liberalized interstate banking laws. This can be due to increased expansion opportunities and to triggering of reciprocity provisions which may increase the potential acquirers of the out-of-state banks. However, the recent deterioration of the profitability of the ‘super-regionals’ may change the perception of the value of interstate activities. Because money center banks already have some interstate operations and the new opportunities as a result of the legal changes do not represent a relatively large part of their business, they do not appear to be positively affected by the liberalization of interstate banking. These results indicate that banks are generally positively affected by the passage and effective imposition of interstate banking laws. Only money center banks which are not in the state or region in most cases are not on average favorably affected by changes in the laws. Stigler’s (1971) proposition that regulation is demanded by the regulated and supervised by regulators for the benefit of the regulated is supported by our results from interstate banking. His capture theory of regulation suggests that a state will liberalize its interstate banking regulations only if such actions would benefit the regulated banks in its state. These laws apparently have benefited the banks within the states in the 1980s and thus it is not surprising that a large proportion of the states have enacted such laws. Since a number of states enacted interstate banking legislation with an explicit focus on deterring entry by money center banks, it is not surprising to find that these banks have not benefited from this legislation. Passage of these laws may have been aided by the fact that many out-of-state banks can also expect to benefit from their passage and effect imposition. The liberalization of interstate banking laws has appeared to benefit those who are regulated. We might expect that the regulated banks in the future will successfully call for further changes in laws which will benefit them, perhaps even for the deregulation of interstate branching and the further expansion of banking powers.
References Amel. D., 1988, State laws affecting commercial bank branching, multibank holding company expansion, and interstate banking, Mimeo. Board of Governors of the Federal Reserve System. Ahrony, J.. A. Saunders and 1. Swary, 1986, The effects in monetary policy regime of the profitability and risk of commercial banks, Journal of Monetary Economics 17, 363-377. Ahrony, J., A. Saunders and 1. Swary. 1988, The eNects of DIDMCA on bank stockholders’ returns and risk, Journal of Banking and Finance 12, 317-331. Binder. J., 1985a. Measuring the effects of regulation with stock price data, Rand Journal of Economics 16, 167-183.
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Binder, J., 1985b, On the use of the multivariate regression model in event studies. Journal of Accounting Research 23, 370-383. Black, H., M. Fields and R. Schweitzer, 1990, Changes in interstate banking laws: The impact on shareholder wealth, Journal of Finance 45, 1663-1671. Board of Governors of the Federal Reserve System, various dates, Selected interest rates, Statistical Release H.15. Cornett, M.M. and S. De. 1991, Common stock returns in corporate takeover bids: Evidence from interstate bank mergers, Journal of Banking and Finance 15. 273-295. Goldberg, L. and G. Hanweck, 1988, What can we expect from interstate banking, Journal of Banking and Finance 12, 51-67. King, B.F., S.L. Tschinkel and D. Whitehead. 1989, Interstate banking developments in the 1980s. Economic Review, Federal Reserve Bank of Atlanta, 32-51. Laderman, ES. and R.J. Pozdena, 1991, Interstate banking and competition: Evidence from the behavior of stock returns, Economic Review, Federal Reserve Bank of San Francisco, Spring, 3247. Stigler, G.J., 1971, The theory of economic regulation, Bell Journal of Economics and Management Science 2, Spring, 321. Thompson, R., 1985, Conditioning the return generating process on firm specific events: A discussion of event study methods, Journal of Financial and Quantitative Analysis 20, June, 151-186. Zellner, A., 1962, An eflicient method of estimating seemingly unrelated regression and tests for aggregation bias, Journal of the American Statistical Association 57, June, 348-368.