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Private Equity Investment in U.S. Banks

Robert DeYoung, University of Kansas School of Business
Michal K. Kowalik, Federal Reserve Banks - Federal Reserve Bank of Boston
Gokhan Torna, State University of New York-Stony Brook University - College of Business

Abstract

We study large, long-term private equity investments in 87 publicly traded commercial banks made possible by a loosening of Federal Reserve regulations in 2008. Bank shareholders earned premiums upon the announcement of the PE investments, positive abnormal returns persisted throughout the durations of these deals, and earnings multiples were commensurate with the performance of non-bank PE investments. PE investors played an active role by increasing the risk incentives in bank CEO contracts. Bank earnings growth accelerated and bank risk profiles increased, consistent with historical regulatory concerns that private equity investment would make commercial banks riskier.

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Robert DeYoung, University of Kansas School of Business
Michal K. Kowalik, Federal Reserve Banks - Federal Reserve Bank of Boston
Gokhan Torna, State University of New York-Stony Brook University - College of Business

Abstract

We study large, long-term private equity investments in 87 publicly traded commercial banks made possible by a loosening of Federal Reserve regulations in 2008. Bank shareholders earned premiums upon the announcement of the PE investments, positive abnormal returns persisted throughout the durations of these deals, and earnings multiples were commensurate with the performance of non-bank PE investments. PE investors played an active role by increasing the risk incentives in bank CEO contracts. Bank earnings growth accelerated and bank risk profiles increased, consistent with historical regulatory concerns that private equity investment would make commercial banks riskier.

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