Market Misreaction? Leverage and Mergers and Acquisitions (2022), with C.N.V. Krishnan. 

Journal of Risk and Financial Management

Using a large database of mergers and acquisitions (M&As) announced from 2010 through 2017, we examine the effects of capital ratio (leverage) on the announcement period stock price reaction as well as on longer-term stock returns and performance, for banks, and compare with non-banks. We find that, for banks, a lower capital ratio of acquirers at the time of the announcement of the M&A is significantly associated with negative announcement-period abnormal returns. However, for these banks, the longer-run abnormal returns and performance are positive. The opposite is true for non-bank M&A announcements: higher equity ratios (lower leverage) of acquirers as at the time of announcement is significantly associated with negative announcement period abnormal returns. But, for such non-banks, the longer-run abnormal returns and performance are positive. This shows that the market may misreact, on average, to both bank and non-bank M&A announcements, based on the acquirer's leverage at the time of announcement.