Our paper is related to two strands of the literature: on the one hand, those studies analysing the empirical consequences of M&As; on the other, papers examining agency problems in delegating power across hierarchical levels.
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2 We focus on acquisitions rather than mergers because we still have the chance to distinguish between target and bidder, characterized by a specific organizational framework. Our principal interest is, moreover, to study the changes of power delegation in target banks; this would not be possible in the case of a merger, because the target disappears after the deal.
3 We do not investigate the effect of organizational changes on credit supply, because this further link has already been examined by a large strand of literature, summarized in the following section. Concerning the relation between more decentralized banking organizations and the greater extent of relationship banking, see Benvenuti et al. (2009). The relation between organizational framework, business specialization and the economic performance of a bank is empirically analysed for the Italian banks, in Bongini
Bank acquisitions and decentralization choices 79
With respect to the first, many researchers have studied the impact of M&As on banking performance and credit availability. Some studies have documented a reduction in credit supply to small borrowers, due to the growing organizational complexity of banks (Berger et al., 1995; Peek and Rosengren, 1996; Udell, 1998; Scott and Dunkelberg, 2003). For Italian banks, Focarelli et al. (2002) show that a merger usually causes a greater share of credit to be granted to large companies, persistent in the long-run, while this effect is not always found after an acquisition. Credit rationing has been better quantified by considering the geographical extent of bank activity or by distinguishing results by bank size (Keeton, 1996; Peek and Rosengren, 1998; Avery and Samolyk, 2000; De Vincenzo and Iannotti, 2002; Sapienza, 2002; Beretta and Del Prete, 2007). Other empirical findings have supported the idea of the dynamic effects of M&As which, in the long-run, stimulate the role of local and new banks and only lead to a temporary reduction in credit supply to SMEs4 (Berger et al., 1998; Berger et al., 2001; Berger et al., 2000; Keeton, 2000; Bonaccorsi di
Patti and Gobbi, 2001; Bonaccorsi di Patti and Gobbi, 2007).
However, these studies do not provide evidence on the “root cause” of the changes in banking credit policy after M&As. Moreover, mixed results of M&As between large and small banks underline the existence of a “crucial” link between banking organization, lending technology and specialization in SME finance. Since in this literature organizational changes are latent variables, size and geographical reach are widely employed as proxies of banking organization, even if these proxies might not be fully satisfactory.
The second strand of the literature can shed further light on this topic. When firm size enlarges, agency and information costs tend to develop more than proportionally (Berger and Udell, 2002). Larger intermediaries, stemming from consolidation, may experience diseconomies à la Williamson (1988),5 because of higher coordination costs in lending during the transition period
(especially if information is innately soft, as for SMEs); as a consequence, organizational diseconomies can shrink the scope of large banks (Cerqueiro et al., 2007).
Agency problems could be important in explaining the different results of M&As. When two or more very dissimilar institutions consolidate, they face higher integration costs due to differences between dealing partners in terms of corporate culture, performance, information technology, lending practices and workplace environments. In such cases, the cost of control could increase and cause some difficulties for target banks in sustaining previous credit relations or performance. Consequently, parent banks have to cope with an organizational trade-off between delegation and control over the target intermediary.
Agency models highlight how organizational shocks, mainly caused by M&As, could affect in different ways incentives for local loan managers to set up relationship lending and gather soft information. Following Stein’s framework, within larger banks information has to go through several hierarchical layers (organizational complexity); thus the transmission of proprietary (soft) information upward could be difficult, because it cannot be directly verified by anyone other than the agent who produces it. This means that in more complex organizations, CEOs are less efficient in creating incentives and in distributing funding across branches to finance more opaque firms. There are many reasons for this: more levels of bureaucracy, lower motivation for line managers, greater agency or moral hazard problems (which arise when the decision-making power is separated from expertise on information). Stein (2002) argues that, when soft information is ——————
4 If loans that are adversely affected have a positive net present value, the consolidation process may generate business opportunities for rival banks and modify their lending organization. This may also happen because local banks benefit from their knowledge of the economic environment and from their comparative advantage in gathering soft information.
5 Studies on banking performance after M&As (Focarelli et al., 1999 and Del Prete, 2002) suggest diversification revenues following a merger and portfolio restructuring after an acquisition; they confirm that there are few cost savings, due to rigidity in personnel and organizational structures, both for large and mutual banks.
crucial, decentralized banks are more efficient in financing smaller firms. This model, based on agent incentives and soft information, could explain why M&As involving small banks generally have a lower impact on small business lending.
Consolidation can also generate greater organizational complexity and hence higher costs for monitoring local managers; therefore the local managers’ tenure at the same branch could be lower (Ferri, 1997), providing fewer incentives to establish face-to-face relationships with SMEs.
Organizational shocks after a deal could be influenced by technological innovation, too. The implementation of innovative internal rating systems should reduce the disadvantage of large and centralized banks in the treatment of SME information (Akhavein et al., 2005; Berger et al., 2005a; Berger and Udell, 2006). These techniques may also mitigate agency problems, since their adoption in the evaluation of creditworthiness can also facilitate the remote control of lending decisions by local managers. Evidence suggests that large and consolidated banks show a higher share of credit granted to SMEs if they have adopted rating or scoring systems (Frame et al., 2001) or a closer correlation between interest rates and the risk of default (Panetta et al., 2004).
These theoretical predictions have been tested using the link between size and hierarchical complexity (Berger et al., 2005b) and by case studies. Liberti (2003 and 2005), using data on a large bank’s loan approvals, argues that transmission of, and reliance on, soft information is higher under decentralized than centralized institutions. This is consistent with the findings of Liberti and Mian (2006), who show that soft information depreciates across hierarchical levels and that whoever is given more authority puts more effort into collecting soft information.
To our knowledge, no empirical evidence is at present available about the effect of M&As on banks’ organizational features. In this paper, we take up the following question: “Do bank acquisitions influence organization design (centralization/decentralization) and potentially affect local loan officers’ incentives?”. We also try to test whether Stein’s hypothesis of a trade-off between delegation and control is true. To this end, we analyse banks entering a group following an acquisition, so as to corroborate and better explain the mixed effects of consolidation.