Journal of Monetary Economics 31 (1993) 117-128. North-Holland

FSLIC assistance and the wealth effects of Savings and Loan acquisitions*

Atul Gupta Bentley College, Waltham, MA 02154, USA

Richard L.B. LeCompte Wtchtta State lfmversrty, Wichita. KS 67208, USA

Lalatendu Misra Umcersity of Texas at San Antonio, San Antomo, TX 78285, USA

Received August 1990, final version received September 1992

This paper exammes whether FSLIC-assisted failed thrift mergers in the 1980s resulted in wealth transfers from the insurance fund to acquiring firm stockholders. We find that winning bidders earned posittve abnormal returns upon the announcement of such mergers. More importantly, the abnormal returns are larger in cases where the FSLIC provided direct financial assistance, and bidder abnormal returns are positively related to the size of FSLIC assistance. These results suggest that the process followed by the FSLIC in arranging failed thrift mergers did result ‘in wealth transfers,

1. Introduction

Estimates of the present value of the U.S. government’s liability resulting from Savings and Loan (S&L) failures during the 1980s exceed $150 billion and continue to grow. The large number of failures following deregulation resulted from the inability of many S&Ls to adapt to the changing regulatory, economic, and competitive environment, exacerbated by factors such as excessive risk taking, inadequate regulatory supervision, poor management, and fraud.’ One

Correspondence to: Atul Gupta, Department of Fmance, Bentley College, 175 Forest Street, Waltham. MA 02154-4705, USA.

*We would hke to thank Gordon Karels, Donald Mullineaux, Jim Musumeci, Steve Smith, and particularly an anonymous reviewer of this journal for extremely helpful comments on earlier drafts of this paper. Financial support in the form of summer research grants from our respective institutions IS gratefully acknowledged. The usual disclaimer applies.

‘Kane (1989). Barth and Bradley (1989). and Kormendi et al. (1989) discuss the genesis and evolution of the thrift crisis in detail.

0304-3932/93/$05.00 0 1993-Elsevier Science Publishers B.V. All rights reserved

I Man- F

approach used for failed thrift resolution is to arrange a merger between the failed institution and a solvent firm, with the FSLIC providing an assistance package to cover the bad assets of the failed thrift. The focus of this paper is to examine if this resolution process has added to the cost of S&L failures by generating a wealth transfer from the insurance fund to acquiring firm share- holders.

The approach taken in this paper is similar to that employed in James and Weir (1987) in that abnormal returns to acquiring firm shareholders upon the announcement of the acquisition of a failed thrift are used to test the wealth transfer hypothesis. We find that winning bidders obtain significantly positive abnormal returns at the time of the acquisition announcement, a result consis- tent with the possibility of a wealth transfer from the insurance fund to the acquirer. As we argue, however, this result could also be due to the nature of the auction process and other factors which have little to do with wealth transfers.

To gain added insight into the wealth transfer possibility we examine differ- ences in abnormal returns to acquirers in supervisory versus assisted mergers with failed thrifts. Supervisory mergers are transactions in which the FSLIC provides no direct financial assistance to the acquiring firm. The wealth transfer hypothesis would be supported by the finding that abnormal returns to ac- quirers of failed thrifts are larger in assisted transactions relative to supervisory mergers, implying that the FSLIC provides excessive amounts of assistance. Empirically, we observe that acquirers in assisted transactions do in fact obtain larger dollar abnormal returns than acquirers in supervisory mergers.

As a final test of the wealth transfer hypothesis we examine the cross-sectional relationship between abnormal returns to winning firm shareholders and the amount of assistance provided by the FSLIC. The amount of the assistance package is designed to compensate the acquiring firm for the difference between the liabilities and the ‘clean’ assets of the acquired thrift. and is thus transaction- specific. In an efficiently priced transaction the amount of assistance would be sufficient to cover the expected value of the underperforming assets of the failed thrift, and we would not expect to find a relationship between the amount of FSLIC assistance and the abnormal returns to acquiring firm shareholders. However, we find a statistically significant positive relationship between assistance and abnormal returns, which is supportive of the wealth transfer hypothesis.

2. Merger procedures

The primary mechanism used by the FSLIC to resolve a failed thrift is to arrange a merger between it and a solvent institution. The relatively poor quality of a failed thrift’s assets generally results in the acquiring firm accepting only a subset of the assets of the failed institution, while assuming all of the

A. Gupta et al.. Wealth effects of FSLIC-assisted S&L mergers 119

acquired firm’s deposits. The FSLIC provides the acquiring firm with an assistance package designed to make up the difference between the expected value of the assets and liabilities transferred in the merger.

In most cases direct capital assistance in the form of cash or net worth certificates is provided. In addition to direct capital assistance, benefits accrue to the bidder from loan loss guarantees, minimum yield guarantees, forbearance on liquidity and capital requirements, unlimited branching rights, and tax conces- sions. Prior to December 1988, the tax code also had special provisions for thrift institutions with respect to interest received from capital loss coverage, yield maintenance plans, floating rate notes, and operating and tax loss carry- forwards and carry-backs. These tax breaks for failed thrift bidders involved no direct cost to the FSLIC insurance fund and the tax incentives were substantial. In fact, the FSLIC is reported to have completed negotiations on 34 deals involving 75 thrift institutions during the month of December 1988, primarily to avoid a 50% reduction in the tax benefits that would have been effective in the following year.

Unlike the procedures followed in FDIC failed bank auctions, the FSLIC process for failed S&Ls is a hybrid. The FSLIC invites a select group of bidders meeting its eligibility requirements to bid for an asset. Submitted bids serve as a preliminary screening mechanism to help the FSLIC identify serious bidders. After analysis of the initial bids, the FSLIC enters into negotiations with some bidders regarding the exact nature of the bid, including the extent of required assistance. In the event of either failure in negotiations or likelihood of a better offer by another party, the FSLIC may enter into discussions with other interested bidder(s). The FSLIC procedure therefore differs markedly from the sealed bid auction process employed in FDIC failed bank mergers.

3. Wealth transfer possibilities

In an ideal situation (i.e., no wealth transfer) the expected value of the assets transferred plus the assistance package should be equal to the value of the liabilities that are transferred to the acquiring firm. A systematic wealth transfer from the FSLIC to acquiring firm stockholders arises, however, if the FSLIC generally provides an assistance package for which the expected value of the failed thrift’s assets plus the assistance exceeds the value of the liabilities transferred from the failed institution to the acquiring firm. Such a possibility is more likely in failed thrift mergers relative to failed bank Purchase and Assump- tion (P&A) transactions arranged by the FDIC, since the FSLIC bidding process allows failed thrift acquirers an opportunity to negotiate the amount of assistance to be provided by the regulator.

The wealth transfer hypothesis is tested using abnormal returns to acquiring firm shareholders upon the announcement of the acquisition of a failed thrift. If

120 A Gupia el al.. Wealth effcrs of FSLIC-assisted S&L merger.r

we assume that observed abnormal returns should be zero in the absence of a wealth transfer from the FSLIC, then finding positive abnormal returns would be sufficient evidence to conclude that the FSLIC provided excessive assistance to failed thrift acquirers. Requiring a benchmark of zero abnormal returns in these transactions may, however, be inappropriate since acquiring firm shareholders are expected to earn a positive abnormal return even in the absence of excessive assistance. This is based on the characteristics of FSLIC failed thrift mergers as common value sealed bid auctions, for which French and McCormick (1984) postulate that the winner should earn a quasi-rent represent- ing the industry’s aggregate bid preparation costs. Further, they argue that the capture of such sunk costs is necessary for the long-run equilibrium of the industry. Thus, auction theory suggests that the acquirer of a failed thrift is expected to earn positive abnormal returns.

Positive abnormal returns to bidders could also be indicative of other factors. Since bidders in FSLIC-assisted transactions must be ‘qualified bidders’, the winning bidder receives an implicit seal of approval from the FSLIC, which may yield positive abnormal returns to acquiring firm shareholders.’ Thus, while positive abnormal returns will necessarily be observed in the event of a wealth transfer from the insurance fund to acquiring firm stockholders, a finding of positive abnormal returns does not constitute sufficient evidence for concluding that a wealth transfer has occurred. The uncertainty regarding the magnitude of abnormal returns that would u priori be expected in a transaction with no excessive assistance from the insurance fund makes it difficult to specify a bench- mark against which the observed abnormal returns should be compared.

One possible approach is to compare bidder abnormal returns in failed thrift acquisitions with abnormal returns to acquirers of solrent thrifts. If we assume that these transactions are similar except for the existence of FSLIC assistance, the finding of significantly greater abnormal returns in assisted transactions relative to acquisitions of solvent thrifts would suggest the existence of wealth transfers. Unfortunately, there are two critical differences between the transac- tions that make such a comparison of dubious value. The first is the nature of the auction process, and the second is the method of financing (acquisitions of solvent thrifts are generally stock exchange transactions, while failed bank mergers are cash transactions). Finally, empirical evidence on the wealth effects of acquisitions of solvent thrifts suggests that acquiring firm shareholders suffer significant wealth losses upon the announcement of these transactions. We analyzed the bidder response in non-FSLIC-assisted acquisitions of solvent

*Booth and Smith (1986) hypothesize that the investment banker’s reputation provides certdica- tlon of proJect quality. In a similar vem, the FSLIC’s reV,ew of a thrift can certtfy both the target thrift’s asset quality and the bidder’s quahty. The announcement of merger approval should thus ehcit a posltlve price response for the wlnmng bidder in view of the imphed certification of its asset quahty by the FSLIC. James (1987) also notes a comparable external vahdatlon of a firm’s quality m the context of bank loans and lines of credit

A. Gupta et al., Wealth effects of FSLIC-assisted S&L mergers 121

thrifts, and found a statistically significant two-day announcement period abnormal return of - 0.75% for a sample of 89 acquisitions during 197991988 (results are available from the authors). Koch, Rogers, and Trifts (1990) also report similar findings. Using wealth losses as a benchmark against which to make conclusions regarding wealth transfers therefore seems inappropriate.

A more appropriate benchmark is to use cases where the FSLIC arranged superoisory mergers of failed thrifts with solvent institutions. Supervisory mergers are transactions in which the FSLIC provides no direct financial assistance to the acquiring firm. Any positive abnormal returns earned by acquiring firm shareholders are thus a consequence of factors like industry bid preparation costs and/or ‘seal of approval’ effects. The wealth transfer hypo- thesis can be tested by examining the difference in abnormal returns between supervisory and assisted mergers; the hypothesis would be supported by finding larger abnormal returns for FSLIC-financially-assisted mergers relative to mergers undertaken merely under FSLIC supervision.

A direct test of the wealth transfer hypothesis can be conducted by examining the relationship between the amount of FSLIC assistance and abnormal returns to acquiring firm shareholders. Under the zero wealth transfer scenario, the financial assistance package would be equal to the difference in the value of the liabilities of the failed thrift and the expected value of the subset of assets that are transferred to the acquiring firm. Under the null hypothesis of zero systematic wealth transfer from the FSLIC to the bidder, we should observe no relationship between the abnormal returns to acquiring firm stockholders and the amount of FSLIC assistance. If acquiring firm stockholders earn positive abnormal returns upon the announcement of failed thrift acquisitions, and the abnormal returns are positively correlated with the assistance package provided by the FSLIC, then the null hypothesis of zero wealth transfers from the insurance fund may be rejected.3

Finally, some institutions may have a greater ability to negotiate a relatively larger assistance package from the FSLIC than other institutions. The amount of assistance that is provided depends upon the estimated difference between the values of the failed thrift’s liabilities and the expected value of the subset of assets that are transferred to the acquiring firm. It is expected that thrift and other financial acquirers would possess superior ability in estimating the asset values of the failed thrift relative to nonfinancial acquirers, and thus have a bargaining advantage in the bidding and negotiation process. We examine this possibility by comparing abnormal returns earned by financial and nonfinancial acquiring firms.

3James and Wetr (1987) test the wealth transfer hypotheses for FDIC-assisted failed bank mergers by examining the relattonshtp between abnormal returns to wmning budders and the number of bidders m the auctton. They find a significant negattve relattonship, whtch ts supporttve of the hypotheses of a flawed auctton process In the case of FSLIC-assisted failed thrrft mergers, however, Information on the number of budders m each auction is not available from the regulators, makmg such a test imposstble.

4. Data description

The sample consists of publicly traded winning bidders for insolvent thrift institutions during the period 1980-1988. A number of sources were utilized to obtain the sample, including the Wall Street Journal (WSJ), the Wall Street Journal Index (WSJI). Mergers and Acquisitions. various issues of FHLBB news releases, and a merger list compiled by the FHLBB. The bid date was identified from the WSJI and was subsequently rechecked in the WSJ and the FHLBB News Release.

There are 48 bids for S&Ls out of which direct monetary assistance from the FSLIC was provided in 40 cases and eight cases of supervisory mergers involv- ing no direct outlay of funds by the FSLIC. The 48 bids were made by 39 firms; 32 bidders made one bid and seven bidders made multiple independent bids during the period under study. Some of the independent bids were for more than one failed thrift, resulting in a total of 86 acquired S&Ls ~ a maximum of 12 S&Ls being acquired in one particular case. The frequency of failed thrift acquisitions increased in the late 1980s; 10 bids from 1980 to 1985, nine bids during 1986 and 1987, and the majority of bids, 29, occurred during 1988. Finally, the sample includes acquiring firms from different industries; 25 are S&Ls, 12 are banks, and 11 are nonfinancial firms, including manufacturing and real estate companies.

Asset, deposit base, and stock price data were obtained from the Standard and Poor’s Stock Guide and Moody’s Bank md Finance Manuals to test various secondary hypotheses. The size distribution of bidders is shown in table 1. Based upon book value of assets, S&L acquirers are larger than nonfinancial acquirers, but smaller than acquiring firms in the financial industry that were not S&Ls. In terms of the market value of equity, however, S&L acquirers are the smallest, followed by nonfinancial firms and non-S&L financial firms, respectively.

Estimates of the magnitude of the assistance package were obtained from the FHLBB news releases, which provide e.u unte estimates of the direct cost of the assistance to the insurance fund. As indicated earlier, FSLIC assist- ance is not limited to direct subsidies but involves other types of explicit and implicit benefits that are nonpublic information. Therefore, the exact total value of the assistance package is not a known quantity ex ante, and in many cases e.x post. The level of direct assistance. announced for 40 out of the 48 transactions, ranged from $1.2 million to $1.49 billion and exceeded $500 million in six cases. The majority of the cases involved smaller amounts of assistance with 26 cases reporting less than $100 million in assistance. The sample mean and median values of assistance were $196 million and $45 million, respectively. The average size of assistance during 1988 was $262 million, compared to the average assistance of $41 million during the preceding nine years.

A. Gupra et al.. Wralrh effects of FSLIC-ussisred S&L mergers 123

Table 1

Acquirer size distribution, by Industry, for 48 falled thrift acquisitions. 198&1988.

S&Ls Banks Nonfinancial

firms All firms

No. of cases Mean Mean excl. max. Std. dev. Mimmum 1st quartlle Median 3rd quartile Maximum

Panel A Book value of‘total asset9

$5.3:: s34,7:: 4,842 19,057 5,925 60.8 15

142 323 816 1,498

1.900 15.054

$4.8;: 4,160 3,976

178 2.194 3.370

7,799 251748 3,742 16.72 1 207,666 11,928

48 $12.578

8,428 33,328

142 1.150 3.742

13,110 207,666

Mean Mean excl. max. Std. dev. Minimum 1st quartile Median 3rd quartile MaxImum

Panel B: Market aalue ofoutstandiny equrtg” $217 $31,571 $745 $676

186 978 633 519 294 2.187 712 1,291

7 15 82 7

27 208 162 67 740 214 2:: 292 2.019 422 948 959 8,088 1.863 8,088

“In rmllions of dollars.

5. Methodology

Standard event study methodology is used to compute abnormal returns to acquiring firm stockholders. The day that the winning bid is reported in the Wall Street Journal is designated as day 0 in event time. Since it is possible that news of the acquisition became public on the day preceding the announcement day, the two-day period including the day of the Wall Street Journal story and the preceding day is treated as the announcement period. Daily abnormal returns (AR) are computed using the market model given by

AR,, = Ri, - (ai + jiR,t), (1)

where ARi, is the abnormal return for bidder i on day t relative to the event date, Ri, is the return for stock i on day f, and R,, is the return on the NYSE/AMEX (NASDAQ) value-weighted market index on day t. The market model coeffi- cients are estimated using returns data for t = ( - 130, - 1 1).4 Daily abnormal

41n cases where a firm makes multiple acquisitions. the estimation period for a subsequent bid may span the announcement period of a previous bid. To minimize possible contamination of parameter estimates m such cases, we deleted the period t = ( - 5, + 5) for the previous tnd if the second bid was made within 120 days of the first bid. Of the seven firms making multiple bids (16 events), there were a total of four bids that occurred within the 120-day period.

124 A. Gupta et al.. Wealth effects of FSLIC-assured S&L mergers

returns are averaged in event time to obtain average abnormal returns (AAR) for the period t = ( - 10, + lo), and cumulative average abnormal returns (CAAR) are obtained by summing the AARs over various intervals. In the absence of abnormal performance, the expected values of AAR and CAAR are zero. Test statistics for AAR and CAAR are based on the average standardized abnormal return (ASAR,) and average standardized cumulative abnormal return (ASCAR,.,), where

(2)

ASCAR,,, = i: ASAR,, (3) t=Ll

and S,,, the square root of firm i’s estimated forecast variance, is given by

where

s,’ = residual variance for firm i from the market model regression, Li = number of observations for firm i in the comparison period, R rnf = market return for day t of the event period, R, = mean market return for the comparison period, R mk = market return for day k of the comparison period.

1.12

(4)

Assuming cross-sectional independence, ASAR, approaches a normal distri- bution with mean zero and variance l/N. The statistics Z, and Z,,b are unit normal and are used to test the null hypothesis that AAR, and CAAR,,b equal zero, where

Z, = fi s ASAR,, (5)

(6)

Finally, while bids were generally dispersed over time, 11 bids shared four event dates. In these cases prediction errors are correlated, and the OLS residual covariance matrix was computed. The test statistic for the AAR during the

A. Gupiu et al.. Wealrh effects of FSLIC-assrsted S&L mergers 125

dependent event periods explicitly includes the covariance between the estima- tion period residuals and is normally distributed.5

6. Results

The two-day announcement period abnormal return for winning bidders is 1.02%, and is significant at the 1% level (z-statistic = 2.56), suggesting that acquisitions of failed thrifts are positive net present value transactions for winning bidders. If the two extreme values are excluded, the abnormal return is 0.98%, and 60.4% of the abnormal returns are positive. Further, the cumulative abnormal returns for the 10 days preceding and following the announcement period are - 0.35% and + 0.51%, and both are statistically insignificant. These results for FSLIC-assisted S&L acquisitions are consistent with the findings of Balbirer et al. (1992), and also conform to the pattern of recent FDIC-assisted commercial bank acquisition studies. James and Weir (1987) and Bertin et al. (1989) find that bidder abnormal returns in FDIC-assisted bank bids are positive (z + 1.0%). Pettway and Trifts (1985) however, find that FDIC- assisted bank bidders experience losses (zz - 7.6%) in the period following the bid.6

To get some sense of the dollar value of the observed abnormal returns, the change in the value of the bidder’s equity was computed as a product of the two-day announcement period abnormal return and the average market value of the bidder’s equity during the week preceding the announcement. The average gain is $7.12 million which is comparable in magnitude to the gain of $6 million reported by James and Weir (1987) for FDIC-assisted failed bank acquirers.

The positive announcement period abnormal return is consistent with the possibility of a wealth transfer from the FSLIC, but could well be due to other factors. As discussed in section 3, one possible benchmark against which the observed abnormal return can be compared is the abnormal return earned by

sIf m securittes share a common event date, the test stattsttc is 2, and tt IS given by

1 m Z, = 7 1 SAR,, where

v,c’ I=, SAR,, = ?,

1,

where SAR,, IS the standardtzed abnormal return for stock i on day t. p,, is the correlation between the esttmation period residuals of stock I and J (i > j), and P’ = (m + 2Zp,,).

‘We also examined the abnormal returns for transaction prior to 1988 and durmg 1988 (the year of the controversial Southwest Plan) For 1988 transactions. the CAAR IS 0.62% (;-statistic = 2.31; 29 cases) compared to a CAAR of 1.62% (2-stattstic = 1.94; 19 cases) for prior years. and the difference is not statistically significant. Further, abnormal returns for December 1988 deals are smaller than for transactions during the rest of that year. This evidence does not support the conlecture that assisted transactions durmg 1988 yielded excesstve returns.

bidders in supervisory mergers. For the sample used in this study there were eight supervisory mergers involving no direct cash assistance from the FSLIC. and the average increase in equity values for these eight cases is $0.23 million, compared to a gain of $8.5 million in nonsupervisory assisted mergers (40 cases). This suggests that buyers of failed thrifts who get an assistance package from the FSLIC obtain a larger abnormal dollar gain relative to buyers with no FSLIC assistance, a result consistent with the notion of excessive assistance by the FSLIC in failed thrift mergers. However, caution is warranted due to the small sample of supervisory mergers.

The cross-sectional relationship between abnormal returns to winning bid- ders and the amount of FSLIC assistance provides a more direct test of the wealth transfer hypothesis. As discussed earlier, FSLIC assistance compensates acquirers for the nonperforming assets of the target and consequently the buyer receives the nominal ‘clean’ assets plus the assistance. If the insurer had perfect knowledge regarding the quality of the failed thrift’s assets and liabilities, it would provide only enough assistance to compensate the acquirer for the nonperforming assets of the failed institution.

In the absence of perfect regulatory foresight, the size of the assistance is expected to be an unbiased estimator of the failed thrift’s potential losses. The null hypothesis of no excessive assistance by the FSLIC implies that there should be no relationship between the magnitude of bidder stock price response and the stated size of FSLIC assistance. Conversely, if the assistance is biased upward and overcompensates for the bad assets of the failed thrift, a positive relationship between bidder returns and the level of assistance should result. The finding of a positive relationship between the size of FSLIC assistance and bidder abnormal returns would thus constitute evidence in favor of the wealth transfer hypothesis.

Results from two regressions using announcement period abnormal returns as the dependent variable are reported in table 2. The regressions are estimated using weighted least squares, and the weight is the inverse of the standard error of the prediction errors. The dependent variable is the standardized (weighted) abnormal return over the two-day announcement window.

In addition to FSLIC assistance, the regressions control for relative size and explore the role of bidder industry in explaining the observed abnormal returns. Relative size is included because James and Weir (1987) and others find that abnormal returns in corporate acquisitions tend to be positively related to this variable. We compute relative size as the log of the ratio of the book value of target to bidder assets. This variable is called RelSte. A dummy variable for bidder industry is included because it is possible that bidders from the financial sector have greater bargaining power with the FSLIC relative to nonfinancial bidders. In this case bank and S&L acquirers may be able to obtain relatively larger amounts of assistance from the regulator, which would imply that bidders from the financial sector would obtain higher abnormal returns relative to nonfinancial bidders. This dummy variable is called Dlnd.

A. Gupra et al., Wealth eflects of FSLIC-assrsted S&L mergers 127

Table 2

Coeffictents for wetghted least squares regresstons relatmg acquirer announcement pertod abnormal returns to the industry of the acqmrer, relattve stze of the acquisition. and the amount of FSLIC

assistance (r-statistics m parentheses),

Independent vartable”

Constant Dlnd” RelSz-_e’ RelAssrst* Log (Asmt) ’ F RI

- 0.003 0.437 0.000 0.035 4.69 0.24 ( - 0.36) (1.39) (0.15) (3.31)

- 0.015 0.501 - 0.001 0.005 3.57 0.17 ( - 1.23) (1.53) ( - 0.33) (2.62)

“Weights are rectprocals of the standard errors of the acquiring firm’s two-day announcement perrod abnormal return. The dependent variable is the acquirmg firm’s two-day announcement period standardized (I.e.. wetghted) abnormal return.

bDInd is I if the budder is a financial Institution (37 cases), 0 otherwise (I I cases). ‘RelSlze 1s the (weighted) ratto of the log of target’s to acquirer’s book assets. dRelAssist is the (weighted) ratto of FSLIC assistance to the book value of target assets. RelAssrst

is 0 for supervtsory cases, ‘Lo&Assist) IS the (weighted) log of the dollar amount of FSLIC assistance for cases wtth direct

tinanctal assistance (40 cases). For supervtsory mergers wtth zero financial asststance (etght cases), Loy(Assrst) 1s 0.

The size of FSLIC assistance is introduced into the regression in two ways _ the log of assistance [Log(Assist)] in one regression and a measure of relative assistance (RelAssist), computed as the ratio of assistance to target assets in the other regression. Scaling the size of assistance by target assets appears to be a more useful definition of assistance, since the dollar value of assistance is expected to be greater for larger acquisitions.

The coefficient for bidder industry (Dlnd) is positive in both regressions. but is not significant at conventional levels. The relative size coefficient (RelSize) is positive in one regression, negative in the other, and is not significantly different from zero in either case. The measures of assistance, Log(Assist) and RelAssist, however, are positive and significant in both regressions, providing support for the wealth transfer hypothesis outlined earlier.’ These results indicate that bidder returns in FSLIC-assisted failed thrift mergers are driven primarily by the magnitude of the assistance package provided by the regulator, and that, on average, the amount of assistance more than compensated the bidder for the nonperforming assets of t:ie acquired thrift. The evidence is consistent with the conclusion that the process used by the FSLIC in arranging mergers between

‘Multtcollinearity may lead to estimates that have wrong signs or are not statisttcally significant. However. multtcollineartty 1s not a problem here smce the condttion numbers of 5.46 and 7.22 for the two (egressions are well below the crtttcal number of 30.

128 A. Gupiu et d.. Weulth effects of‘ FSLIC-assisted S&L mergers

failed thrifts and solvent firms results in a wealth transfer from the insurance fund to the winning bidder, adding to taxpayer costs incurred due to S&L failures.

7. Conclusions

This paper examines the wealth effects of acquisitions of failed thrifts from the FSLIC over the 1980-1988 time period. We find that winning bidders in these transactions earn positive abnormal returns, which are of a similar order of magnitude to winning bidders in failed bank auctions conducted by the FDIC. Further, bidder abnormal returns in cases where the FSLIC provided direct assistance to the acquiring firm are larger than in cases where there was no direct assistance, suggesting that the amount of FSLIC assistance drives the observed abnormal returns. Finally, the cross-sectional relationship between bidder abnormal returns and the amount of FSLIC assistance is found to be positive and significant, which is consistent with the argument that the FSLIC provided excessive assistance to winning bidders in such transactions, resulting in wealth transfers from the insurance fund to acquiring firm stockholders.

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