The recent U.S. financial crisis and governmental bailout of financial institutions have intensified the debate on the need for effectively measuring and monitoring the financial institutions’ risks. This paper contributes to this discussion by introducing a market-based capital measurement that better captures the dynamics of bank risk and returns. Evidence confirms that these market-based capital adequacy metrics are much more sensitive to risk factors and more responsive to economic events than the traditional accounting/regulatory report based capital models, which often underestimate the true capital needs. The CDS premia, another market-bases solvency measure, seems to overreact to declines in capital adequacy.

In contrast to the previously documented cross-border discount, we find that there is positive cross-border effect for US acquirers during late 1990s and early 2000s. This is especially particular the case for those that acquire/merge with targets from segmented financial markets where acquirers experience significantly higher positive abnormal returns than those that acquire targets from integrated financial markets. Furthermore, firms acquiring segmented-market targets are also characterized by significantly higher post-merger operating performance improvement. The results indicate that the observed positive cross-border effect is mainly due to the increase in the number of transactions involving targets from segmented markets, in which the average firm experience significant financial constraints. We contend that value is created by a combination of firms with different financial market integration status, in which funds are provided to high cost firms. The finding that the value creation is even higher within the group of acquirers with a lower cost of capital provides additional support for our conjecture.