THE VALUE OF A REGULATORY SEAL OF APPROVAL

Atul Gupta

Journal of Financial Research, 1997, vol. 20, issue 1, 111-128

Abstract: I investigate whether obtaining a regulatory seal of approval adds to firm value. For a sample of thirty‐four firms that acquired the insured deposits of failed banks, I find a significantly greater price response for firms that could benefit from obtaining a regulatory seal of approval than for firms that had recently obtained a similar form of approval. Further, abnormal returns to winning bidders are significantly larger when a regulatory seal of approval is likely to be more valuable, i.e., when the industry faces severe economic problems. In addition, bidder gains are significant only in markets where regulatory certification of a firm's health is important—markets that have recently experienced several bank failures. Finally, wealth transfers from the FDIC insurance fund may contribute to bidder gains. The evidence suggests that obtaining a regulatory seal of approval can positively affect firm value.

Date: 1997
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