This paper shows how an opportunity for future bank acquisition can be viewed as call options, how its valuation relates to bank lending, and its effect on the incentive to conduct bank acquisitions. Given this incentive, the optimal bank lending decision demonstrates that the marginal Tobin's q in the acquisition and non-acquisition alternatives must be equal. Moreover the acquirer bank's loan market value increases with volatility. This paper suggests that bank acquisition can also be important in influencing a bank's lending decision. A theoretical acquisition framework is set up, along with several model assumptions. The paper applies equilibrium and comparative statistical analysis. In this paper, a simple Black-Scholes model is developed to study optimal bank lending, considering opportunities for a future acquisition. This paper demonstrates a crucial link between bank lending and acquisition decisions on pricing the acquirer bank's risk-adjusted equity.
International Journal of Management 20(1), pp.36-42