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Bank M&A: A market power story?

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Abstract

This paper analyzes capital market reactions to international bank M&A. We investigate the combined stock return patterns of targets, bidders, and their peers upon takeover announcement, and closing or withdrawal. We distinguish five common M&A hypotheses and relate characteristic and mutually exclusive abnormal stock return patterns to each hypothesis. The findings show that there are more investors who believe in gains through the exploitation of market power by the post-merger entity than investors who believe in any of the other motives tested in the paper. In a multinomial logistic model we show that patterns related to market power significantly concur with large relative target size, intra-industry mergers, and increasing market concentration, suggesting a substantial lessening of competition through M&A.

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... The information on the M&A deal announcements of banks is taken from Thomson Reuters. The initial sample should comply with the following criteria: First, the acquirer is a European bank (SIC code 6020) listed on a stock exchange in the EU, Switzerland or Norway, as in other studies examining European bank mergers (e.g., Beltratti and Paladino, 2013;Hankir et al., 2011;Ismail and Davidson, 2007). Second, the target is a public, private, or subsidiary firm, either EU-based or foreign. ...
... We follow prior merger literature to identify controls for firm and deal factors (see Appendix for variable definitions), and thus, we include: the age (AGE) (Barbopoulos and Wilson, 2016;Draper and Paudyal, 2006) and the size of the acquirer (SIZE) (Adra et al., 2019;Hankir et al., 2011); the deal value (DVALUE) (Brewer and Jagtiani, 2013;Hagendorff et al., 2008); the relative size of the deal (RSIZE) (Fuller et al., 2002); and the market-to-book ratio of the acquirer (MTB) (Beltratti and Paladino, 2013;Megginson et al., 2004). ...
... Specifically, we include five variables as proxies for: bank profitability (PROF), risk profile (RISK), asset utilisation (ASSET), leverage (LEV) and liquidity (LIQ). PROF is measured by the return-onequity ratio (Beltratti and Paladino, 2013;Hankir et al., 2011). RISK is measured by the provision for loan losses to the total loan ratio (Asimakopoulos and Athanasoglou, 2013). ...
Article
We explore the association between board gender diversity and shareholder value creation. Specifically, we investigate the impact of gender diversity on the economic impact of bank mergers and acquisitions (M&A). We employ a multi-year sample of M&A announced by European listed banks and find that: (i) the presence of women on the board of directors has a positive and statistically significant effect on acquirer gains; and (ii) boards with three or more women, or where women represent more than 25% of the board, have a stronger impact on acquirer gains than in the opposite case, consistent with critical mass theory. Moreover, banks with a critical mass of female directors perform better in undertaking value-enhancing M&A after the global financial crisis. Policy makers and practitioners could benefit from the findings by exploiting the advantages of board heterogeneity in terms of gender.
... Bidder firms often recognize specific complementarities between their businesses and that of the target; therefore even though the target is already performing well, it should perform even better when it is combined with its complementary counterpart, the bidder firm. The theory suggests that targets perform well both before and after the merger (Chatterjee, 1986;Altunbas & Ibanez, 2008;Hankir, Rauch, & Umber, 2011). The implication of this is that operating synergies are achievable in horizontal, vertical and even conglomerate mergers. ...
... The implication of this is that operating synergies are achievable in horizontal, vertical and even conglomerate mergers. The synergy theory makes the assumption that economies of scale exists in the industry and that before the merger, the firms are merely operating at levels of activity that fall short of achieving the economies of scale (Chatterjee, 1986;Weston, Chung, & Hoag, 2003;Altunbas & Ibanez, 2008;Hankir et al., 2011). ...
... and Hankir et al. (2011) explain the possibilities for increased from cross selling, and cost reductions arising from efficiency gains. ...
Article
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Mergers and Acquisitions deals that create value constitute at least one or a combination of financial and operational synergy. This paper investigates the effect of synergy on financial performance of merged institutions in the financial services sector in Kenya. The paper adopted a mixed research design, pre and post-merger secondary data was collected from 40 (forty) institutions in the Kenyan financial services industry that had concluded their merger processes by 31 December 2013. Financial synergy was proxied using the liquidity ratio while operating synergy was measured using growth in sales. Primary data was used to explain the results of the secondary data. Panel data analysis was used to determine the change in the study variables and trends over time between 2009 and 2013, event window (pre-merger and post-merger) analysis was used to test for any significant difference in performance means before and after merger as a result synergy, while regression analysis was used to determine the relationship between synergy and profitability. Results show that there is a positive relationship between performance, operating synergy and financial synergy, and that there was significant improvement in performance post-merger. From these findings, the study recommends that institutions should critically evaluate the overall business and operational compatibility of the merging institutions and focus on capturing long-term financial synergies as this has a positive effect on the performance.
... This resource based view however has setbacks in that it focuses on the company's internal potential as a source of competiveness but ignores "the need for the external market orientation to achieve competitive success" (Broderick et al., 1998). Three types of synergies have been identified; these are cost of production related that leads to operational synergy, cost of capital related that leads to financial synergy and price related (Chatterjee, 1986;Altunbas and Marques, 2008;Hankir et al., 2011;Hellgren et al., 2011). Hankir et al. (2011) also supports this view. ...
... Three types of synergies have been identified; these are cost of production related that leads to operational synergy, cost of capital related that leads to financial synergy and price related (Chatterjee, 1986;Altunbas and Marques, 2008;Hankir et al., 2011;Hellgren et al., 2011). Hankir et al. (2011) also supports this view. Synergy theory explains M&A transactions that are undertaken with the aim of realizing synergies that will boost future cash flows thereby enhancing firm's value. ...
... These include operating and financial synergiesas an underlying structure of the synergy theory (Chatterjee's, 1986). (Chatterjee, 1986;Altunbaset al 2008;Hankir et al., 2011), intimate that financial and operating synergies are achieved by either increasing the firm size; referred to as scale or by combination of the firm specific advantages also referred to as scope; while Hankir et al. (2011) asserts that the third type; thus collusive synergy is often approached separately in circumstances that deals with more complex explanations of operational and financial synergies Synergistic mergers theory suggests that the bidder firm can achieve efficiency gains by combining an efficient target with their business thereby improving the target's performance. The bidder firms often recognize specific complementarities between their business and that of the target; therefore even though the target is already performing well, it should perform even better when it is combined with its complementary counterpart, the bidder firm. ...
Article
Purpose: The purpose of the study was to determine the effect of synergy on the financial performance of merged institutions.Methodology: The study adopted a mixed methodology research design. The study population included all the 51 merged financial service institutions in Kenya. Purposive sampling was used. Primary data was obtained from questionnaires and a secondary data collection template was also used. The researcher used quantitative techniques in analyzing the data. Descriptive analysis for the study included the use of means, frequencies and percentages. Inferential statistics such as correlation analysis was also used. Panel data analysis was also applied. Further, a pre and post merger analysis was used.Results: Synergy had a significant relationship with financial performance of merged institutions.Unique contribution to theory, practice and policy: The study recommended that institutions should critically evaluate the overall business and operational compatibility of the merging institutions and focus on capturing long-term financial synergies. They should increase their scope to create high performing supply chains with significant long-term upside that provide sustained value for customers and stakeholders.
... Small acquirers gain more from mergers compared to large ones, irrespectively of the form of financing and the listing status of targets. Hankir et al. (2011) find similar results for bank mergers, while Leledakis et al. (2017), Doukas and Zhang (2013) and Gupta and Misra (2007) report an insignificant relationship between the abnormal returns of acquiring banks and their size. Kane (2000) shows that large banks-being "too big to discipline adequately"-gain value when acquiring large targets, while Brewer and Jagtiani (2013) find insignificant returns for acquirers that already have or reach the "too big to fail" status after the merger. ...
... Following previous studies (e.g., Beltratti & Paladino, 2013;Hagendorff et al., 2008;Hankir et al., 2011;Minhat & Abdullah, 2016;Pathan & Faff, 2013), we include in Equation 5 additional variables to control for bank profitability, total risk and leverage. We control for profitability as proxied by return on equity at year-end preceding the deal announcement. ...
... Doukas and Zhang (2013) find no significant effect of activity focus or diversification on bidder returns. Hankir et al. (2011) suggest a significant positive relationship between focused transactions and the returns of acquirers in deals driven by the market power hypothesis. Therefore, to control for potential effects of activity focus, we use a dummy variable that is assigned a value of 1 for focused deals (i.e., bidder and target share the same 2-digit Standard Industrial Classification code) and 0 for diversified ones. ...
Article
We explore the effect of the presence of female directors in boards of directors on the economic impact of bank mergers and acquisitions (M&As). Using a unique, hand‐collected dataset on 1,130 M&As announced by U.S. banks between 2003 and 2018, we find a significant negative relationship between female board membership and shareholder wealth after the banking crisis. Our results are robust to alternative model specifications that control for different proxies for gender diversity, heteroskedasticity, endogeneity and firm‐specific variables. Our findings suggest that board gender diversity should be promoted with caution, and policy makers should acknowledge its limitations as a corporate governance mechanism.
... Based on these findings, Hankir et al. (2011) argue that banks which expand in an alreadyconcentrated environment may earn excess profits due to a lessening of competition, and as a result, they should realize positive announcement abnormal returns. Up to date, evidence along these lines in the European Union (EU) is rather elusive, due to the high degree of competition in the region (Goddard et al., 2013). ...
... In this regard, mergers which allow banks to operate in more concentrated environments should also create value for the acquiring firms' shareholders, due to the lessening of competition. Hankir et al, (2011) predict positive shareholder wealth gains for banks which choose to expand in highly-concentrated markets. In contrast, mergers occurring in low-concentrated environments may have the opposite effect for the acquiring firms' shareholders. ...
... There is a wide range of literature supporting the significant impact of market structure on banks' profitability (Bourke, 1989;Berger, 1995;Hankir et al., 2011). Hence, we test this relationship by utilizing two stage-regressions in a similar fashion with the abnormal returns analysis. ...
... There is extensive literature on the value gains (positive abnormal returns) of rivals of recently-merged firms (Song & Walkling, 2000). These studies begin with Eckbo (1983Eckbo ( , 1985 and extend to the research by Song and Walkling (2000) and Hankir, Rauch, and Umber (2011); however, in this field, the Brazilian literature is scarce. These studies have, for the most part, found positive abnormal returns in rivals of newly-merged firms. ...
... Yet, the article by Eckbo and Wier (1985) rejects this hypothesis that, by eliminating competitors, horizontal mergers facilitate the collusion of the remaining companies, leaving open the explanation for the positive returns of the rivals of recently-merged firms (Eckbo, 1983(Eckbo, , 1985Eckbo & Wier, 1985;Hankir et al., 2011;Song & Walkling, 2000). Song and Walkling (2000) trace a parallel between the probability of a bank being merged and the abnormal returns observed in the market in relation to the concentration resulting from mergers and acquisitions (M&As). ...
... Song and Walkling (2000) trace a parallel between the probability of a bank being merged and the abnormal returns observed in the market in relation to the concentration resulting from mergers and acquisitions (M&As). According to Hankir et al. (2011), the positive abnormal return found in the rival banks of those recentlyconglomerated by the market can be observed by the fact the market is heated and, with this, the investors of rival firms expect their companies to be closer to being merged. ...
Article
Full-text available
The aim of this study is to investigate the stock market’s reaction to bank merger and acquisition (M&A) events in Brazil when the market is heated. This article aims to fill the research gap involving bank M&As and their effects, especially those arising from M&A waves. This field remains open in the literature; there is no consensus as to the abnormal returns the investor can expect from this mechanism. The notion that bank M&A markets heat up is discussed and still does not present a consensus in the literature. Therefore, topics that involve research on specific M&A strategies and their effects are interesting for the literature. The results of this research point to the emergence of positive cumulative abnormal returns for rivals of newly-merged acquiring banks and zero ones for acquired banks. This analysis occurs because in heated markets the probability of rival banks becoming involved in M&As increases, leading to market gains and greater market power for acquiring banks and the rapid pricing of acquired bank assets. This result corroborates with the post-merger analysis, in which the accounting performance indicators of the acquiring banks are positive. The market reaction was verified through the use of the event study econometric technique, which was applied in the investigation of the occurrence of abnormal returns in time windows of up to 41 days around the bank M&A events. The study measured the stock market’s reaction to a motivation for M&As, which is the effect of M&A waves. This article contributes to the literature by highlighting specific forms of bank M&As. In particular, the logic of merger by market forces is addressed. This mechanism of mergers by market forces is presented as evidence of the tendency for M&As and not of paid-in earnings.
... Acquisitions are seen as aggressive competitive actions (Adams et al., 2009) that shift a market's competitive structure (Hankir et al., 2011). This shift, even if usually beneficial for all firms, is particularly favorable for the acquirer (Eckbo, 1983;Kim and Singal, 1993;Singal, 1996;Stillman, 1983). ...
... In the context of our study, the size of the target is a particularly important characteristic when considering how rivals may react to acquisitions (especially if we consider acquisitions within the same industry) because it has important implications for the competitive position of a firm (Josefy et al., 2015). In acquisition settings, target size influences not only the potential synergies associated with a transaction (King and Schriber, 2016), but also how a deal shapes the acquirer's market power (Hankir et al., 2011). We argue that while acquisitions of smaller target firms create firm-level benefits for the acquirer, it does not significantly impact the acquirer's market power and hence does not significantly change the mutual forbearance equilibrium between the industry players. ...
... Indeed, when considering pre-acquisition competitive interdependencies, the target firm's characteristics are particularly important because they influence both the competitive dynamics and the structure of a market following the transaction (Keil et al., 2013;Uhlenbruck et al., 2017). For example, Hankir et al. (2011) show that stock market reactions of bidders, targets, and rivals to acquisition announcements are positive if markets expect industry consolidation as a result of the deal. This effect is particularly strong when relatively large targets are acquired. ...
Article
Full-text available
Acquisitions are competitive moves that disrupt an industry's competitive structure. As a result, firms are often not passive observers of their rival's acquisitions, but actively retaliate against such competitive moves. In this study, we explore these dynamics by analyzing one way in which multimarket contact may influence acquisition strategies, namely, the type of targets acquired. We contribute to the acquisition literature by clarifying the role that pre-acquisition competitive interdependencies play in firms' acquisition strategies. Specifically, we suggest that high multimarket contact firms do not necessarily avoid acquisition activity. Instead, these firms are more likely to acquire targets that are less likely to incur retaliation from interconnected rivals. We also explore two important boundary conditions to this relationship: (1) the market's competitive structure and (2) the location of the target firm. Our empirical tests of a sample of 741 bank holding companies from 1995 to 2014 offer support for our hypotheses.
... Bidder firms often identify distinct complementarities between their businesses and that of the target; for that reason even though the target is already performing well, it should operate even better when it is amalgamated with its complementary counterpart, the bidder firm. The theory propounds that the performance of the target company remains well both before and after the merger (Altunbas & Marques, 2008;Hankir et al., 2011). From this, it can be inferred that operating synergies are attainable in horizontal, vertical and even conglomerate mergers. ...
... The synergy theory assumes that economies of scale prevail in the industry and that premerger; the firms are just operating at levels of activity that fall short of realizing the economies of scale. (Chatterjee, 1986;Altunbas & Marques, 2008;Hankir et al., 2011) Operating synergies can be achieved through revenue enhancement or cost reducing measures. The principal source of operating synergy arises from cost reductions, which may be the result of economies of scale. ...
... Probable sources of revenue enhancements might emanate from splitting of marketing opportunities by crossmarketing each merger partner´s product (Gaughan, 2010). Hellgren et al. (2011) and Hankir et al. (2011) elucidate the possibilities for added revenues arising from crossselling and cost reductions resulting from efficiency gains. The financial synergy theory, on the contrary, rests on the premise that nontrivial transaction costs related to raising capital externally besides the differential tax treatment of dividends may comprise a condition for more dynamic allocation of capital through mergers from low to high marginal returns, production activities, and probably offer a justification for the quest of conglomerate mergers (Fred et al., 2003). ...
Article
Mergers and acquisitions are broadly undertaken to have extraneous advantages for the combined entity vis-à-vis standalone entities. The objective of the study is to evaluate the actual financial synergy realisations in case of four recent and significant MandA deals in three different sectors in India: automobile, banking, and pharmaceuticals. These are: Amtek Auto and JMT Auto; Kotak Mahindra and ING Vysya Bank; Sun Pharmaceuticals Industries Ltd and Ranbaxy Laboratories; and Express Scripts and Medco Health Solutions. Synergies are calculated for few basic parameters including revenue, expenditure, and PAT in all the four deals and also for industry-specific elementary performance indicators for proper evaluation of the industry. The results suggest Kotak Mahindra -ING Vysya Bank and Sun Pharma-Ranbaxy deals were able to realise most of the synergies that were estimated and were on the right track towards synergy realisation in the post-acquisition period. However, the Amtek Auto-JMT Auto deal couldn’t realise cost synergies as their expenditures elevated to high levels after the merger but it managed to attain lower cost of capital financial synergies. On the other hand, Express Scripts-Medco deal badly failed because it couldn’t attain revenue synergies after the merger. The study concludes with the relevant policy implications.
... Nevertheless, the effects may be different in emerging economies. One relevant issue in M&As is the effect of announcements in terms of creating value for shareholders and the possible impacts of announcements on stock volatility (Elyasiani et al., 2016;Hankir et al., 2011;Houston & Ryngaert, 1994;Hutson & Kearney, 2001). 4 Accordingly, this paper has two goals: first, to quantify whether M&A announcements generate abnormal returns for the acquirer, the target, and rival banks. ...
... However, Goddard et al. (2012) identify that in bank M&As, acquirers have zero abnormal returns while targets have positive abnormal returns. The positive effects depend on the firm's market power after the deal, the reduction in information asymmetry about targets, and improvement in corporate governance policies (Akhigbe & Madura, 2001;Alexandridis et al., 2017;Hankir et al., 2011;Humphery-Jenner et al., 2017). The negative effects are related to irrational or behavioral motivations (Cort es et al., 2015;Gugler et al., 2012;Shleifer & Vishny, 2003) and managers' motivations that are not in line with shareholders' interests (Fama et al., 1969;Jensen, 1986;Kosnik & Shapiro, 1997). ...
... This behavior depends on whether the M&A generates efficiency gains. In contrast, Hankir et al. (2011) and Nain and Wang (2018) argue that this effect is caused by the market power that acquirers and targets gain due to the deal. Another justification for positive abnormal returns by rivals is the signaling theory. ...
Article
This paper focuses on the effect of mergers and acquisitions (M&As) announcements on the stocks of Latin American banks and their rivals between 2000 and 2019. We evaluate two impacts of M&A announcements: impacts on cumulative abnormal returns (CAR) and impacts on event-induced variance (EIV). We use the GARCH-based event-study method, finding that acquirers and target banks have a statistically significant CAR and that their rivals and targets are not affected by M&A announcements. We observe that EIV is negative for acquirers, targets, and rivals. Finally, in a robustness exercise, we estimate a multivariate GARCH model, finding that the results remain qualitatively equal.
... 7 However, as mentioned above, the effects may be different in emerging economies. Specifically, one relevant issue in M&As is the effect of announcements in terms of creating value for shareholders and their possible impact on stock volatility (Elyasiani, Staikouras, & Dontis-Charitos, 2016;Hankir, Rauch, & Umber, 2011;Houston & Ryngaert, 1994;Humphery-Jenner, Sautner, & Suchard, 2017;Hutson & Kearney, 2001;Nain & Wang, 2016;Piloff & Santomero, 1998). Thus, this paper has two goals: first, to quantify whether M&A announcements generate abnormal returns for the acquirer, the target, and rival banks; second, to measure whether M&A announcements create market volatility due to evidence about acquirers, targets, and rivals. ...
... Akhigbe and Madura (2001) find positive and significant valuation effects for publicly traded acquirer and target insurance companies. In general, the positive effects can be explained by the market power obtained by firms due to the deal, the reduction in information asymmetry about companies, and improvement in corporate governance policies (Alexandridis et al., 2017;Hankir et al., 2011;Humphery-Jenner et al., 2017); whereas the negative effects are related to irrational or behavioral motivations (Cortés et al., 2015;Gugler, Mueller, & Weichselbaumer, 2012;Shleifer & Vishny, 2003) and to personal motivations of managers that are not in line with the interests of shareholders (Fama, Fisher, Jensen, & Roll, 1969;Jensen, 1986;Kosnik & Shapiro, 1997). Therefore, we conclude that deals involving strategic decisions or that generate synergy for companies participating in M&As correspond to events that create value for shareholders. ...
... This behavior depends on whether the M&As generate efficiency gains. In contrast, Hankir et al. (2011) and Nain and Wang (2016) show that this effect is caused by the market power that acquirers and targets gain because of the deal. Another justification for positive abnormal returns by rivals is signaling theory. ...
... Based on these findings, Hankir et al. (2011) argue that banks which expand in an alreadyconcentrated environment may earn excess profits due to a lessening of competition, and as a result, they should realize positive announcement abnormal returns. Up to date, evidence along these lines in the European Union (EU) is rather elusive, due to the high degree of competition in the region ( Goddard et al., 2013). ...
... There is a wide range of literature supporting the significant impact of market structure on banks' profitability (Bourke, 1989;Berger, 1995;Hankir et al., 2011 variable is the ΔROA. The results of the first-stage regressions are similar to what reported in (2013), who find that de-concentration improves profitability in emerging economies. ...
... The forces that drive value creation, however, through mergers and acquisitions (Ms&As), remain open to further scrutiny by researchers (Hagendorff et al., 2008). Amongst the motives for bank Ms&As that the literature has suggested, we mainly find the idea of increased market power, economies of scale and synergies for the combined entities (Hankir et al., 2011). Scholars claim that these factors lead to improvements in efficiency and profitability (Copeland et al., 2003). ...
... Economies of information can be achieved by reducing monitoring costs in the context of credit risk (Panetta et al., 2009). Ms&As do not only result in fewer players dominating capital markets, but also entail significant changes in the market value of the parties involved (Hankir et al., 2011). The wealth of knowledge regarding bank consolidation comes from the US studies whereas European banks have been largely underexplored even though this trend is gradually reversed (Beltratti and Paladino, 2013;Hagendorff et al., 2012;Lozano-Vivas et al., 2011 andVan Lelyveld andKnot, 2009, among others). ...
Article
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Do domestic banks Mergers and Acquisitions Still Create Value? Recent Evidence from Europe George Kyriazopoulos, Evangelos Drymbetas Abstract We study the M&A phenomenon in Europe during an extensive period spanning 1996-2010 using a sample of 118 domestic bank Ms&As. We compare the short-term impact of acquirer and target share prices around the announcement period and find significant abnormal returns for target banks for the 3-day event window. We argue that prior profitability can explain short-term price effects for both acquirers and targets since ROA affects positively cumulative abnormal returns when employing cross-sectional regression analysis. Accordingly, bidder banks, displaying prior low return on equity, experience losses in the post-event 10-day period, while target banks losses expand throughout our 21-day event window, underlying the important role of ROE on the formation of investment decisions and overall market perception. Investors favour both acquirers and sellers with high prior profitability. Full Text: PDF DOI: 10.15640/jfbm.v3n1a10
... Bidder banks enjoy value creation in domestic deals with listed targets and in deals with smaller and less efficient banks. Hankir et al. (2011) consider an international sample of 600 bank mergers from 1990 to 2008 intending to identify the prevailing IJMF M&A motive. As far as the European banking sector is concerned, the authors calculate insignificant excess returns for bidders. ...
... The market model and the four-factor model yield similar results for both samples and the differences between the two models are not statistically significant across all the applied event windows (Panel C). In line with previous studies (Karamanos et al., 2015;Asimakopoulos and Athanasoglou, 2013;Beltratti and Paladino, 2013;Tsangarakis et al., 2013;Hankir et al., 2011;Manasakis, 2009), our results lead to the conclusion that both bank M&As and bank transactions neither create nor destroy shareholder value. ...
Article
Purpose The purpose of this paper is to investigate the wealth implications of bank mergers and acquisitions (M&As) in the unique Greek setting given the triple crisis phenomenon – banking, sovereign debt and economic crises – that prevailed after the global financial crisis. Design/methodology/approach The study examines bank M&As and bank transactions over the period from 1997 to 2018, as well as government-assisted M&As during the crisis. The wealth effects of bank M&As are assessed using both univariate and multivariate frameworks. Findings Findings show a neutral crisis effect on the valuation of M&As upon their announcement. However, the authors provide conclusive evidence that M&A completions are value-destroying events for acquiring banks during the crisis, far worse than in the pre-crisis period. Greek banks also fail to create value from government-assisted mergers. The results suggest that the financial stability and the prevention of further deepening of the Greek crisis with possible contagion effects were achieved at the expense of shareholders and taxpayers. Originality/value To the authors’ knowledge, this is the first study that examines the impact of the Greek triple crisis on the wealth effects of bank M&As and bank transactions. Also, the study provides first evidence with regard to the economic impact of government-assisted M&As in the European context.
... By examining the market power implications of stock exchange mergers, our study has bridged a significant gap in the literature. While mergers and market power have been examined in other industries, including the banking industry (e.g., Hankir et al., 2011) and airline industry (e.g., Kim and Singal, 1993), our study, to the best of our knowledge, is the first study to empirically examine market power effects of mergers in the stock exchange industry, an important sector of the economy. The only study on the stock exchange industry that focuses on the effect of mergers on competition/market power, to our knowledge, is by Kokkoris and Olivares-Caminal (2008), but their study is a survey of the professional as well as a review of the academic literature with no empirical testing of the market power hypothesis in the stock exchange industry. ...
... Market power effects of mergers have been extensively examined in the banking, airline and other industries, and these studies provide a good setting for this paper. While most of this literature concludes that mergers and acquisitions lead to the exercise of market power, usually in the form of unfavourable prices and/or reduced output such as cutting off borrowers (e.g., Kim and Singal, 1993;Singal, 1996;Berger et al., 1999;Sapienza, 2002, Hankir et al., 2011Ryan et al., 2014;Fraisse et al., 2018), there are studies that provide evidence to the contrary (e.g., Focarelli and Panetta, 2003;Shaffer, 2004;Weinberg, 2005;Park, 2009;Coccorese, 2009;Delis et al., 2017). The contradictory results notwithstanding, the majority of the evidence seems to support the conclusion that increase in market concentration more often leads to the exercise of market power in these industries. ...
Stock exchange mergers can lead to increased efficiency; however, increasing levels of concentration can potentially lead to the exercise of market power. We investigate the market power repercussions of stock exchange mergers and find that the industry’s concentration levels have not significantly increased and the concentration levels do not influence exchanges’ profitability in the post-merger period. The profitability of the merging exchanges in the post-merger period is largely influenced by efficiencies in revenue generation and cost management. The absence of evidence that stock exchange mergers lead to the exercise of market power suggests that there does not appear to be an immediate need for regulatory agencies to be overly concerned about mergers among stock exchanges leading to the exploitation of market power to the detriment of consumer welfare.
... The pertinent literature has identified several factors which construe acquisitions in the banking sector (Beltratti and Paladino, 2013). These include: (i) economies of scale associated with centralizing functions like IT and cash management, (ii) economies of information associated with better screening of borrowers, (see Panetta et al., 2009), (iii) market power, (see Focarelli et al., 2002 andHankir et al., 2011), (iv) geographic, portfolio and activity diversification bringing benefits in terms of risk reduction, (see Hughes et al., 1999;Emmons et al., 2004 andVan Lelyveld andKnot, 2009), (v) implicit subsidies connected with a too-big-to-fail (TBTF) status (see Demirgüç-Kunt and Huizinga, 2010), (vi) empire-building on the part of the managers. However, some of these factors have never been tested in Eastern Europe's bank M&As. ...
Article
Full-text available
The main objective of the current study is the examination of the wealth effects emanating from the announcement of mergers and acquisitions (M&As) in Eastern Europe that took place between 1995 and 2015. In specific, the main objective of the paper is the examination of the stock price reaction of both bidders and targets to the announcement of M&As. The method of payment is another aspect that is considered when assessing the wealth effects of M&As. To gauge market reaction, we use both the standard event study methodology and regression analysis. The results show that targets gain significant abnormal returns around event periods, while acquirers seem to earn trivial excess returns. Moreover, cash disbursements in bank M&As boost price appreciations around event dates. The results from regression analysis reveal that the determinants of abnormal returns are the market competitiveness, method of payment, and relative size.
... The pertinent literature has identified several factors which construe acquisitions in the banking sector (Beltratti and Paladino, 2013). These include: (i) economies of scale associated with centralizing functions like IT and cash management, (ii) economies of information associated with better screening of borrowers, (see Panetta et al., 2009), (iii) market power, (see Focarelli et al., 2002 andHankir et al., 2011), (iv) geographic, portfolio and activity diversification bringing benefits in terms of risk reduction, (see Hughes et al., 1999;Emmons et al., 2004 andVan Lelyveld andKnot, 2009), (v) implicit subsidies connected with a too-big-to-fail (TBTF) status (see Demirgüç-Kunt and Huizinga, 2010), (vi) empire-building on the part of the managers. However, some of these factors have never been tested in Eastern Europe's bank M&As. ...
Article
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The main objective of the current study is the examination of the wealth effects emanating from the announcement of mergers and acquisitions (M&As) in Eastern Europe that took place between 1995 and 2015. In specific, the main objective of the paper is the examination of the stock price reaction of both bidders and targets to the announcement of M&As. The method of payment is another aspect that is considered when assessing the wealth effects of M&As. To gauge market reaction, we use both the standard event study methodology and regression analysis. The results show that targets gain significant abnormal returns around event periods, while acquirers seem to earn trivial excess returns. Moreover, cash disbursements in bank M&As boost price appreciations around event dates. The results from regression analysis reveal that the determinants of abnormal returns are the market competitiveness, method of payment, and relative size.
... The dataset consists of 441M&As announced by EU banks between January 1, 2003 and December 31, 2017. Following relevant studies (Beltratti and Paladino, 2013;Fuller et al., 2002;Hankir et al., 2011;Masulis et al., 2007;Moeller et al., 2004;Tampakoudis et al., 2020), the dataset comply with the following criteria: The acquirers are public EU banks; the targets are public, private or subsidiary firms located either in EU-countries or in non-EU countries; M&A deals are completed before the end of the sample period; acquirers have available stock market data, firm-level financial data and ESG scores; to avoid the effect of small transactions, M&As with deal value less than $1 million are excluded; to avoid confounding effects, cluster acquisitions within 20 days are eliminated. ...
Article
One of the main issues in banking and finance sector is measuring the efficiency of mergers and acquisitions (M&A), due to a plethora of key performance indicators (KPI) and variables. In this study, the efficiency of 441 M&A deals is evaluated based on specific inputs and outputs, including the change of environmental and social governance (ESG) scores. Due to presence of negative data, two Data Envelopment Analysis (DEA) and second stage analyses have been applied. The first is a regression model, which examines the impact of control variables on the efficiency of DEA scores. The second is a Support Vector Machine (SVM) model, mapping efficiency based on gender diversity. Results indicate that gender diversity and relative size affect positively the performance of M&A deals and negatively deal value. The SVM model classification indicates which regions of efficiency and stability are reflected by good or bad representation of women in boards.
... Berger and Bouwman [23] indicated that healthy banks, particularly from the point of view of capital and liquidity, have an opportunity to improve their market share and profitability during a crisis by making acquisitions. Thus, this implies positive abnormal returns because acquirers can acquire other banks at lower prices and also benefit from portfolio diversification [24] and market power [25]. Furthermore, Reddy et al. [26] examined 26 countries' cross-border mergers from 2004 to 2010 and found that, following the onset of the crisis, companies in emerging countries took advantage of attractive asset prices by acquiring firms in developed countries. ...
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This paper examines the abnormal returns of acquiring real estate investment trusts (REITs) around the announcement of acquisitions before and after the subprime mortgage crisis. Based on 182 domestic and cross-border US REIT acquisition announcements from 2005 to 2010, the acquiring trusts experienced a 0.73% abnormal return, on average. When the sample was divided into pre-crisis, crisis, and after-crisis subsamples, the acquiring trusts enjoyed the largest abnormal returns (1.86%) for domestic acquisitions during the crisis period. Before the crisis, when the acquisition was cross-border, the target was private, or the transaction was cash-financed, the acquiring trust experienced larger abnormal returns. During the crisis period, the acquiring trust gained larger abnormal returns when the transaction value was larger. After the crisis period, the acquiring trust achieved less abnormal returns in cross-border mergers. For both pre- and after-crisis periods, the shareholders of the acquirer enjoyed larger abnormal returns when the mergers were cash-financed, regardless of whether the target was public or privately held. Neither the blockholder monitoring nor the signaling hypothesis can explain such value gains. The structural changes in the acquirer’s abnormal returns are possibly due to the increased risk aversion of the market participants following the crisis.
... An important aspect of this process has been consoli- dation, as a large number of banks have been merged, amalgamated or restructured. Although, the process of consolidation began in 1980's, it accelerated in the 1990's, leading to the present state of highly concen- trated markets with just a few dominating players (Yassin 2011). During the late 1990s, macroeconomic pressures and banking crises forced banking indus- try to alter its business strategies. ...
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This paper examines the relationship between merger announcements with the stock returns in the Indian Banking during the period of 1999-2008. Using event study methodology, it attempts to ascertain whether the bidder banks experience significant abnormal returns during the post-announcement and pre-announcement periods. The results indicate that bidder banks may or may not experience any significant abnormal returns during the post-announcement period. No bank specific characteristics could explain the pattern of market reaction to merger announcements. However, significant abnormal returns were observed in daily share prices in majority of the cases, during the preannouncement period, indicating possibility of leakage of information in the market.
... Beyond event studies, the hypothesis tested by the ongoing academic research is whether M&As improve profitability and performance of acquirers over the long-term. Acquirers' rationale is to increase shareholder wealth through economies of scale and synergies from the combined organization (Hankir et al. 2011), risk diversification (Mercieca et al., 2007) and replacement of inefficient managers (Rad and Van Beek, 1999). However, irrespective of justification, the sheer essence of the consolidation process is primarily cost reduction and centralization of back office operations (Houston et al., 2001), profitability enhancement (Copeland et al., 2003) as well as improvement in operational performance (Altunbas and Marques, 2008). ...
Article
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inancial institutions have dominated M&A activity in Europe in the last decades. This study examines the longterm impact of bank M&As in Europe in a sample of 152 deals over the period 1996-2010, consisting of both withinborder and cross-border deals. In specific, we examine the longterm Financial performance of combined entities and we find that profitability increases after two to three years of operation even though initially the M&A activity negatively impacts profitability. Analogous patterns of profitability are found for the sample of domestic deals, whereas cross-border M&As seem to benefit from synergistic gains yet later. When examining other efficiency and loan quality ratios the full sample and domestic deals alone show that merging banks employ expansionary policies soon after consolidating. In contrast, in cross-border M&As managers seem to be more cautious with their loans portfolio in a finding possibly related to enforcing complex integrating policies
... Bradley et al. [19] and Dennis and McConnel [20]). Hankir et al. [21], however, have argued that, although theoretically synergy might be anticipated for value creation, the empirical evidence proposes that this might not always be the case due to capital markets not believing in synergy realization as a rationale for acquisition. Moreover, if the acquisition is motivated by the acquirer's 'top management's' hubris about the valuation of the acquisition resulting in a misjudgment on the premium that should be spent on acquiring the target business, this will result in destroying the acquirer shareholder's wealth (Berkovitch and Narayanan [22]). ...
... The approach considers multiple dimensions as a way to find the minimum distance between a sued firm and its industry peers. We conduct the matching process by using two dimensions (total assets and return on assets) and three dimensions (total assets, return on assets and sales) (see, for example, Barber and Lyon (1996) and Hankir, Rauch and Umber (2011)). 12 The method normalizes each dimension by subtracting the industry mean from the sample firm's characteristic. ...
Article
We examine the shareholder wealth effects of Taiwanese firms accused of corporate fraud, and we find evidence that shareholders benefited from the passage of Taiwan's Securities Investor and Futures Trader Protection Act. We not only examine the shareholder wealth effects at different stages of the corporate fraud violation cycle, but we also find evidence of a filing effect and an industry spillover effect. We conclude that shareholders can benefit from external monitoring of the firm's managers, particularly in cases when firms operate in environments with weaker internal governance mechanisms.
... Alternatively, bank M&As and consequent increase of concentration may benefit all banks. Berger (1995), Hannan andBerger (1991), Weinberg (2007), Degryse and Ongena (2008) an recently Hankir et al. (2011) document that M&A transactions lead to higher concentration and price increases. Thus, such a market structure allows other institutions to boost their profits and reduce the competition between them. ...
... Mergers and Acquisitions (M&A) may increase market power, economies of scale and the synergies for the combined entities, reducing labor costs, and decrease operating costs by merging bank branches (Hankir et al. 2011). Panetta et al. (2009), argued that the activities of a combined entity do not necessarily increase overall performance as reducing monitoring costs could increase credit risk. ...
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Estimating potential gains from mergers is an important strategic decision-making problem. This paper introduces a new inverse data envelopment analysis (DEA) based on a cost efficiency model for estimating potential gains from mergers. There are restructuring scenarios for firms that want to minimize cost. The existing inverse DEA technical efficiency models are not appropriate for estimating merger gains in these situations. It is also shown that the proposed inverse DEA cost efficiency model can reveal more merger gains than the inverse DEA technical efficiency model. The applicability of the proposed method is shown through an application in Canada’s banking sector to determine the required level of inputs and outputs for a merged bank to achieve target levels of cost and technical efficiencies. The results highlight the potential financial gains to improving both technical and cost efficiencies as efficiency-seeking banks increasingly become large and complex institutions through growth, mergers and acquisitions in a financial environment that is being shaped by reforms and technological innovation.
... Whereas hubris hypothesis predicts that in case of takeovers, the combined value of the target and bidder firms should fall slightly; a decrease in the value of bidding firm and increase in the value of target firm (Roll, 1986). Market power theory based on the concept of anticompetitive effect argues that takeovers reduce the competition and increase market prices (Hankir et al., 2011noted in Golhich, 2012. Monopoly theory views mergers as being planned and executed to attain market power which cannot possibly occur in horizontal but in conglomerate acquisitions. ...
... The finance and strategy literature took an early interest in identifying firm motives concerning M&A, such as increased scale and scope, efficiency, and increased market power [12][13][14][15]. Other goals were to identify managerial self-interest for free cash flow and diversification related or unrelated through acquisition and corresponding capital market outcomes of M&A activity [16][17][18][19][20][21][22]. ...
Article
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This research analyzed the moderating effects of the continental factor on the relation between the business strategies (cost advantage strategy and differentiation strategy) of the pharmaceutical industry and mergers and acquisitions (M&A) performance. A total of 1303 M&A cases were collected from the Bloomberg database between 1995 and 2016 for the sake of empirical analyses. The independent variables were represented by the cost advantage strategy and the differentiation strategy. The dependent variable was for the M&A performance, which was measured for the changes in ROA (return on assets). The results showed that the cost advantage strategy was advantageous when an Asian firm acquired one in either Asia or Europe. In contrast, when a European company received one in either Europe or Asia, M&A performance also was higher, although the cost was higher. On the other hand, the differentiation strategy was valid only when a European firm acquired one in Asia. The moderating effect of the continental factor was beneficial only in the relation between the cost advantage strategy and M&A performance. These results could help companies make decisions that maximize M&A performance based on continental factors from the perspective of the sustainable international business strategy establishment.
... P&A transactions are indeed subject to the same regulation as regular takeovers due to potential anti-competitive effects. 3 All market participants, acquirers and their rivals, consequently, may boost their profits from a P&A due to a lessening of competition and increased market prices (Prager and Hannan, 1998;Degryse and Ongena, 2008;Hankir et al., 2011). We summarize our next hypotheses as follows: ...
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In this study, we find that non‐merger rival banks of failed banks from 2008 to 2013 experience substantial negative abnormal stock returns in the United States when failed banks are auctioned. Negative abnormal returns are related to contagion effects associated with an increased probability of their own failure and the information of these rival banks' opaque assets. We also find evidence that FDIC resolutions of these failed banks, similar to previous regulatory interventions, distort the market competition.
... (Hankir, Rauch, & Umber, 2011). As fusões bancárias podem ser explicadas, segundo os autores supra, pela busca de poder de mercado, por ondas de reorganizações societárias, por sinergias operacionais e financeiras, para impedir que competidores comprem alvos preferenciais e por problemas financeiros. ...
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Context: the financial market has experienced sharp restructuring and mergers in recent decades. As banks expand the scope of their activities, they raise concerns about the impact on the sector's competitiveness. If the characteristics of the financial industry, which contribute to make the sector more concentrated, can make it less competitive, it implies assessing the relationship between concentration and competition. Objective: the general objective of this study is to promote diagnosis of the organization of the national credit market by calculating and analyzing concentration and competition indicators, between 2000 and 2019. Methods: to measure concentration, the Herfindahl-Hirschman and the Five Major Concentration Ratio indexes are used. The degree of competition is estimated via Lerner's econometric model applied to data displayed on a panel with accounting and financial information from financial institutions. Results: the results suggest that although the concentration has increased in the time frame considered, competitiveness has not deteriorated, reinforcing the argument of seminal references that concentration does not necessarily harm competition. Conclusion: in the absence of academic consensus, this work elucidates the relationship between concentration and competitiveness. Still, it gains relevance by pointing out the role of regulation and credit unions in increasing recent competition. The work thus becomes capable of supporting policies that promote contestability, such as initiatives that relax restrictions on the entry of non-banking institutions and financial technology companies.
... The core activities of the target companies can be differentiated, according to the interest of the acquirer into: R&D and innovation [66,67], pollution degree [68], market share [69,70] and so on. If an acquirer has interest in the sustainable behavior policy of a target company, it may be biased in analyzing its economic activity, but also place it in a different risk category, in relation to the environment [29]. ...
Article
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External growth strategies face crucial barriers when taken into consideration for investing if the involved companies are not audited. The integrity of a company's financial information, its control systems, and its sustainable behavior represent cornerstones when participating in mergers and acquisitions (henceforth M&As). Thus, the audit function became a must and its role increased over the years, becoming an intrinsic part of faithfully disclosing financial and nonfinancial information (sustainable reporting included). M&As are ideal when the need for rapid innovation is required, in order to maintain or develop a sustainability policy. Given the environmental issues, we analyzed a sample of 1491 target companies listed on Bucharest Stock Exchange, clustered into three categories: polluters, medium polluters, and low polluters. The study reveals that the investors' decision to purchase a certain amount of stake in target companies is influenced by the audit opinion and the sector in which they operate, depending on their pollution status.
... Mergers and acquisitions are a process by which two or more organisations come together in order to achieve specific strategic and business goals and these transactions not only have considerable impact on the financial, economic, and political success of organisations concerned but also significantly impact on the human resources (Hankir et al., 2011). However, in spite of the growing sophistication of international M&A activities, studies increasingly show that there is a low rate of success in most mergers or acquisitions (Baynham, 2011;Bert et al, 2003). ...
... Mergers and acquisitions are a process by which two or more organisations come together in order to achieve specific strategic and business goals and these transactions not only have considerable impact on the financial, economic, and political success of organisations concerned but also significantly impact on the human resources (Hankir et al., 2011). However, in spite of the growing sophistication of international M&A activities, studies increasingly show that there is a low rate of success in most mergers or acquisitions (Baynham, 2011;Bert et al, 2003). ...
... Furthermore, the M&A activity in the banking sector is also driven by external factors such as regulatory and institutional environment, macroeconomic development, and competition. [11,12,18,37] While the larger and often listed commercial banks have received much attention in the banking sector M&A literature (e.g., [1,17,29,30], among others), research into the determinants of M&A among regional, often small, stakeholder banks is scarcer (e.g., [8,26,54]). In a study of industry consolidation in the US market, Goddard et al. [25] find that small, old, and highly capitalized credit unions are at a higher risk of acquisition. ...
... Furthermore, the M&A activity in the banking sector is also driven by external factors such as regulatory and institutional environment, macroeconomic development, and competition. [11,12,18,37] While the larger and often listed commercial banks have received much attention in the banking sector M&A literature (e.g., [1,17,29,30], among others), research into the determinants of M&A among regional, often small, stakeholder banks is scarcer (e.g., [8,26,54]). In a study of industry consolidation in the US market, Goddard et al. [25] find that small, old, and highly capitalized credit unions are at a higher risk of acquisition. ...
Article
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This study is the first to examine mergers and acquisitions among small, regional stakeholder banks that belong to the same group. Using data on Finnish unlisted cooperative and savings banks, we investigate the relationship between bank-specific factors and the likelihood of a bank being an acquirer or an acquisition target. We find that large banks tend to acquire small and inefficient banks. Additionally, we examine the loan growth and find a negative (positive), statistically significant association with the likelihood of a bank being an acquisition target (acquirer). Finally, we document an increase in the likelihood of a bank being an acquisition target subsequent to an increase in the share of net fees and commission income against total assets.
... Market power is a commonly-stated motive behind bank M&As (Hankir et al., 2011). Hence, we also use in our models the ratio of each bank's deposits to the total deposits of the U.S. banking industry at a given year (Market power). ...
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This paper investigates the role of textual information in a U.S. bank merger prediction task. Our intuition behind this approach is that text could reduce bank opacity and allow us to understand better the strategic options of banking firms. We retrieve textual information from bank annual reports using a sample of 9,207 U.S. bank-year observations during the period 1994-2016. To predict bidders and targets, we use textual information along with financial variables as inputs to several machine learning models. Our key findings suggest that: (1) when textual information is used as a single type of input, the predictive accuracy of our models is similar, or even better, compared to the models using only financial variables as inputs, and (2) when we jointly use textual information and financial variables as inputs, the predictive accuracy of our models is substantially improved compared to models using a single type of input. Therefore, our findings highlight the importance of textual information in a bank merger prediction task.
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The Indian economic environment provides an advantage to banks and also uniquely accretes value to M&A based transactions proving benefits to bidders unlike in other Bank M&A regimes in the USA. This work provides deeper insight into the linkages between Bank M&A and M&A literature with Indian Banking M&A and reviews the evidence. In a study of 23 M&A transactions in Indian Banks during the period 2006 -2015, we find strong evidence for both bidder and target gains that are used to specify points of comparison in Global US and European markets. These gains reflect on economic conditions advantaging larger mergers, foreign bank exits from India and global policy imperatives advantaging the banking superstructure. Our study shows foreign portfolio exits are significant opportunity losses for Global players and may not be justified by myopic short term responses to a new policy superstructure. The 2014 Kotak ING merger produces a 13.47% CAR in the 0 to +15 event window and 23.8% in the longer range window till trading stops in the ING Groups’ India subsidiary. Large Bank mergers produce large Bidder benefits that are neither obfuscated in event studies nor lost in large value transactions because of ultimate losses to the Bidder in the deal and the purported Merger gains being appropriated by target shareholders and the considered set of transactions show how Indian Bank M&A contributes to the Global Banking M&A literature.
Article
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This paper explores the role of bargaining ability in corporate mergers and acquisitions (M&As) by focusing on acquiring firms with ex-ante market power-powerful bidders. Drawing from a bargaining power theoretical stance, we argue that powerful bidders create value from M&A activity by paying comparatively lower premiums. We test our empirical proposition using a sample of 9,327 M&A deals announced between 2004 and 2016 by bidders across 30 countries. Contrary to the stylized fact that bidders do not gain from M&A activity, we uncover evidence suggesting that powerful bidders pay lower bid premiums and, consequently, earn positive (and relatively higher) cumulative announcement returns (CARs) from M&A deals. On average, the mean returns to powerful bidders (1.3%) are at least twice those of their less powerful counterparts (0.6%). We identify "low financial constraints" as a potential channel through which higher bidder power translates to improved deal performance. Overall, our results provide new evidence on how industry dynamics, notably bargaining power, influences M&A outcomes.
Article
We examine the impacts of geographic strategy of mergers and acquisitions by financial institutions on their short-run and long-run stock price performance, risk, and operating performance. The geographic strategies include ‘in-market,’ ‘partial-overlapping,’ and ‘market-expanding’ acquisitions. While the market initially reacts more favourably towards ‘market-expanding’ acquisitions, acquirers in these acquisitions experience the lowest long-run stock price performance and largest increase in total return volatility and idiosyncratic risk. Acquirers in partial-overlapping acquisitions experience the most deterioration in operating performance. Our results are robust to different measures of geographic expansion and subsample analysis. These findings have geographic implications for the banking industry regarding expansion through acquisition.
Chapter
This chapter presents the findings of the qualitative research related to motivations and performance drivers of M&A. For both SIEs and non-SIEs, key motivations are strategic assets and restructuring for efficiency. However, for M&A of SIEs, there are areas of concerns about expropriation of minority shareholders’ interest, ineffective ownership incentive and low returns on capital invested. These are the manifestation of the principal-principal conflict inherent in SIEs due to the presence of the state shareholder. We use the term “principal cost” to refer to the negative impact of this conflict. We argue that although the principal-principal conflict is a type of agency problem, according to the agency theory, “principal cost” is not and should not be viewed as a subset of agency cost.
Article
Mergers and acquisitions are mainly due to financial and technological innovations but could also be due to changes in the structure of the economy, which alters the optimal production functions of banks. Banks that seek to be operationally efficient would focus more on expanding their asset size, in the face of bad loans, leading to the acquisition of less efficient banks. This paper develops two‐stage inverse data envelopment analysis (DEA) models for estimating potential gains from bank mergers for the top US commercial banks. The results show additional intermediate and final outputs at different predefined target levels of technical efficiencies.
Conference Paper
Large Bank mergers produce large Bidder gains that allow a renewed confidence in the merger and acquisitions strategy and deflect from unfortunate advances in theoretical analysis based in earlier analyses reflecting on event studies as a tool and on the effectiveness of M&A strategies for these acquirers based on negative gains in the Event study literature. (Does not include OLS Decomposition of Abnormal Returns)
Conference Paper
The paper present a robust theory centred in Private information to assuage event study literature and confirm with Acquirer gains in Bank M&A. The ability of larger firms lies in investments in Intellectual capital, harnessing soft information and critically, purloin value in the deal through bargaining based on its own and the Target's specific Private information. Recent literature has affirmed that private targets within the core industry generate Positive returns for acquirers, realising the value of Private information through deal making. Recent evidence from large Bank mergers producing large Bidder gains and the robust theory of private information presented herein is likely to renew confidence in the merger and acquisitions strategy and deflect from other unseemly theoretic literature relying on earlier analysis reflecting on event studies as a tool and on the effectiveness of M&A strategies for these acquirers based in negative gains in the Event study literature. The paper presents theoretic models centered around private information of both acquirer and targets and defend a robust theory supporting the large impact strategy of Mergers evidenced in Horizontal mergers in line with recent literature. As evidence, the paper utilizes the Private information construct to explain intuitive results verified in the literature Banking markets present a unique opportunity in robustly recreating results based on this theory especially in growth memes presented by Asian markets. Foreign portfolio exits are significant opportunity losses for Global players and may not be justified by myopic short term responses to a new policy superstructure.
Chapter
The focus of this chapter is the application of antitrust policies to banking. Following an overview of the basic rationales for bank mergers, the theory of imperfectly competitive banking markets is applied to evaluate the fundamental trade-offs involving cost-efficiency gains from mergers versus deadweight social losses that result. The chapter turns next to a discussion of empirical evidence regarding effects of bank mergers on market power and measures of efficiency gains from bank mergers, It concludes with a detailed consideration and evaluation of real-world policies regarding bank mergers.
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This study provides deeper insight into the linkages between Bank M&A and M&A literature and test the hypotheses that Acquirers gain significantly from a M&A strategy. Analyzing the Banking industry as an example of Horizontal mergers, the study aims to validate that M&A is a value creating strategy. A market model based event study provides robust results. We include private and public targets in the period 2006-2015. In a study of 24 M&A transactions in Indian Banks during the period 2006 -2015, we find convincing evidence for both acquirer and target gains. The t-statistic for Abnormal Returns is significant and Positive Abnormal Returns are shown. Size and profitability measures are not significant in this sample. Acquirers earning positive returns engage in multiple acquisitions and contribute significantly to positive abnormal returns in the sample. Acquirer returns depend on both Target and Acquirer Financial characteristics including Target Loan Loss provisions, Acquirer Tier I Capital, Acquirer proportion of Fee and Interest Income. The key limitation of the study is the unavailability of a larger sample of data.
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Through an analysis over a 20-year period from 1997 to 2017 for a global sample of listed infrastructure companies, 80% of which were utilities, this study shows that target companies' Cumulative Average Abnormal Returns (CAARs) are positive and statistically significant, while acquirer firms earn positive but not statistically significant CAARs. The results obtained must be viewed in light of the restructuring that has distinguished the last 20 years by strongly modifying the infrastructure environment and facilitating the diffusion of mergers and acquisitions (M&A). Our results support the financial reasonableness and potential efficiency of M&A transactions in the infrastructure and public utility sectors, with specific reference to target companies.
This paper examines the role of country-level investor protections on the value of relationships between investment banks (IBs) and their corporate clients. Using an event-study approach and an international sample of consolidation activities in the investment banking industry, we document that clients of target IBs acquired by banks from stronger (weaker) investor protection countries realize lower (higher) returns upon merger announcement. This is consistent with a substitution effect between country-level investor protections and IB-level monitoring of client firms. Overall, our analysis highlights the economic role of country-level investor protection on the relationships between IBs and client firms in an international context.
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This study’s main objective is to present the circumstances that signal an imminent commercial bank liquidation and the conditions in which mergers are advantageous for a potential acquirer. In addition, it applies the method in an empirical investigation within the context of the domestic banking industry. The research reveals new explanatory factors for liquidations and mergers between robust and insolvent banking institutions, such as bankruptcy costs and tax credits derived from a corporate union. The framework stands out for highlighting the role of creditor financial institutions participating in the open and interbank markets, which in the search to maximize their utility together with that of the shareholders have a decisive influence over the continuity or closure of the bank in crisis. The soundness of the financial system is an essential public good for society. Systemic financial crises cause significant costs for economic agents, such as a fall in production, increased unemployment, a rise in the fiscal deficit, and asset price instability. Efforts to achieve stability involve the regular functioning of banks. In this context, it is important to understand the circumstances under which banking institution distress can be solved by alternatives that are less costly for the treasury. Often, the research indicates the causes of disruptions to corporate activities; however, the explanatory variables and the tools used by bankruptcy prediction models are constantly being evaluated. Theories that elucidate the phenomenon are even scarcer. The paper’s result suggests the effectiveness of the method developed from the paradigmatic perspective of the field of economics and management, corroborating agency theory. The explanatory variables of bankruptcy and bank merger highlighted in this research can contribute to the elaboration of robust models to predict financial distress. The mathematical model of liquidation and merger was constructed from the viewpoint of an imperfect world where informational asymmetry and conflict of interests among shareholders, open and interbank market creditors, and bondholders (which includes depositors and holders of bonds issued by the bank) prevail. Bankruptcy maximizes shareholder and creditor utility if liquidation costs plus the value payable to the bondholders after liquidation are lower than the value they receive in the event of continuity. A merger is feasible for an acquirer if expected return plus tax benefits minus bondholder expenses is greater than the value payable to interbank market creditors. The method is applied to the merger between Itaú and Unibanco, considered a milestone in the process of consolidating the banking market in Brazil. This paper suggests the use of an algebraic model, based on agency theory, as an indicator of conditions for liquidations and bank mergers. The proposed approach was adequate for explaining the union between Unibanco and Itaú, which culminated in the largest private financial conglomerate in the Southern Hemisphere. Unibanco experienced the bankruptcy circumstances and there was evidence that Itaú’s tax benefits encouraged the merger. This article contributes to academic epistemology because it revisits the classical model, characterized by mathematical and theoretical robustness, and adjusts it to the specificities of banks. In addition to this methodological novelty, it applies it to an emblematic case, making it a useful tool for corporate decision-making and bank supervision, especially with regards to actions focused on financial stability.
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The global financial crisis in 2008 has highlighted the failure of traditional banking regulations and forced developing countries not only to reinforce existing regulations but also to search for new ways of stabilizing banks. In particular, it became evident that classical prudential regulations can be more efficient if it is complemented for example by good corporate governance, market discipline and efficient procedures for the handling of failed banks by the regulator. In this thesis, we try to identify the efficiency of these different dimensions of bank regulations for the particularly interesting case of Vietnam. After the government’s decision of reform (“doi moi”) in 1986, the country has succeeded in the gradual privatization of different economic sectors, including banking and finance, leading to a more prosperous economy and better living conditions. However, when looking closer at this process, it is possible to identify a number of problems in the financial sector that threaten to slow down economic growth. If Vietnam is to keep growing and catch up with more developed economies, it is essential to understand the root causes of these problems and address them with better financial regulations. We believe that our results will be a step in this direction. We also think that many of our insights should be transferrable to other emerging and transition countries. More generally, Vietnam can also be used as a laboratory to better understand the economic mechanisms that exist in developed countries.
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The persistence of this paper is to assess the impact of Merger and Acquisition on the economy of Bahrain. The experiential research methodology is built on quantitative method by using online questionnaire and expressive statistics using the weighted average mean. The performance of an acquisition is measured by questionnaire distributed using selective sample technique to Head of Departments and executive management. The acquisitions were divided into three domains: Motives, Post-acquisition management and critical factors affecting the economy of Bahrain. The result of this research associates that the so-called planned and structural fit between companies complicated in M&A play an important role in refining the operative performance of the developed companies in the post-acquisition period. Effective acquirers have potential performance on the economy of the country, but they also had some skills and competencies to recover the performance of an acquired firm. The results of our study advocate the conclusion that success acquisition and mergers will lead to robust economy, particularly with regard to convinced aptitudes and skills worldwide.
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Mergers and acquisitions improve market efficiency by capturing synergies between firms. But takeovers also impose externalities (both positive and negative) on the remaining firms in the industry. This paper describes a new equilibrium concept designed to explain and predict takeovers in this setting. We experimentally compare the new equilibrium concept to that of competing con-cepts in situations without and with externalities. Moreover, we examine the predicted dynamics of takeovers and outcome implications of those dynamics. Our experimental results support the predictions of the new equilibrium concept and provide implications for further empirical tests.
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In this paper we report the results of an empirical investigation based on a sample of 105 failed merger bids that occurred in the UK in the 1980's. We find that target firms report large, significant, positive gains after the bid while bidder firms report large, significant, negative gains. We also find that these returns are affected by the extent to which the bidder and target firms are related. In related bids target returns are significantly lower and bidder returns are significantly more negative than in unrelated bids. We conclude that these results are consistent with an information based explanation of merger activity.
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This paper examines herding behavior in global markets. By applying daily data for 18 countries from May 25, 1988, through April 24, 2009, we find evidence of herding in advanced stock markets (except the US) and in Asian markets. No evidence of herding is found in Latin American markets. Evidence suggests that stock return dispersions in the US play a significant role in explaining the non-US market’s herding activity. With the exceptions of the US and Latin American markets, herding is present in both up and down markets, although herding asymmetry is more profound in Asian markets during rising markets. Evidence suggests that crisis triggers herding activity in the crisis country of origin and then produces a contagion effect, which spreads the crisis to neighboring countries. During crisis periods, we find supportive evidence for herding formation in the US and Latin American markets.
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This paper provides a simple framework showing that the extent of competition in credit markets is important in determining the value of lending relationships. Creditors are more likely to finance credit-constrained firms when credit markets are concentrated because it is easier for these creditors to internalize the benefits of assisting the firms. The paper offers evidence from small business data in support of this hypothesis. Copyright 1995, the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
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: The banking industry has experienced an unprecedented level of consolidation on a belief that gains can accrue through expense reduction, increased market power, reduced earnings volatility, and scale and scope economies. A review of the literature suggests that the value gains that are alleged have not been verified. The paper then seeks to address alternative explanations and reconcile the data with continued merger activity. Throughout this paper, the terms merger and acquisition are used 1 interchangeably. 1. Introduction Over the past decade, the banking industry has experienced an unprecedented level o f consolidation as mergers and acquisitions among large financial institutions have taken place a t record levels. In the last three years alone more t han 1500 mergers have occurred in the US market. 1 To a large extent, this consolidation is based on a belief that gains can accrue through expens e reduction, increased market power, reduced earnings volatility, and scal...
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We study the stock market valuation of mergers and acquisitions in the European banking industry. Based on a sample of very large deals observed from 1988 to 1997 we document that, on average, at the announcement time the size-adjusted combined performance of both the bidder and the target is statistically significant and economically relevant. Although our sample shows a great deal of cross-sectional variation, the general results are mainly driven by the significant positive abnormal returns associated with the announcement of domestic bank to bank deals and by product diversification of banks into insurance. On the contrary, we found that M&A with securities firms and concluded with foreign institutions did not gain a positive market's expectation.Our results are remarkably different from those reported for US bank mergers. We explain our different results as stemming from the different structure and regulation of EU banking markets, which are shown to be more similar between them than as compared with the US one.
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Using aggregate balance sheet data from banks across the EU-25 over the period from 1997 to 2005 we provide empirical evidence that national banking market concentration has a negative impact on European banks’ financial soundness as measured by the Z-score technique while controlling for macroeconomic, bank-specific, regulatory, and institutional factors. Furthermore, our analysis reveals that Eastern European banking markets exhibiting a lower level of competitive pressure, fewer diversification opportunities and a higher fraction of government-owned banks are more prone to financial fragility whereas capital regulations have supported financial stability across the entire European Union.
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We consider a model of optimal bank closure rules (cum capital replenishment by banks), with Poisson-distributed audits of the bank's asset value by the regulator, with the goal of eliminating (ameliorating) the incentives of levered bank shareholders/managers to take excessive risks in their choice of underlying assets. The roles of (tax or other) subsidies on deposit interest payments by the bank, and of the auditing frequency are examined.
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Motivated by public policy debates about bank consolidation and conflicting theoretical predictions about the relationship between bank concentration, bank competition and banking system fragility, this paper studies the impact of national bank concentration, bank regulations, and national institutions on the likelihood of a country suffering a systemic banking crisis. Using data on 69 countries from 1980 to 1997, we find that crises are less likely in economies with more concentrated banking systems even after controlling for differences in commercial bank regulatory policies, national institutions affecting competition, macroeconomic conditions, and shocks to the economy. Furthermore, the data indicate that regulatory policies and institutions that thwart competition are associated with greater banking system fragility.
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This paper examines the post-acquisition performance of large bank mergers between 1982 and 1987. On the whole, the merged banks outperform the banking industry. Their better performance appears to result from improvements in the ability to attract loans and deposits, in employee productivity, and in profitable asset growth. Further, we find a significant correlation between announcement-period abnormal stock returns and the various performance measures, showing that market participants are able to identify in advance the improved performance associated with bank acquisitions.
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This study investigates the effect of merger bids on stock returns. Abnormal stock returns are examined throughout the entire merger process for both successful and unsuccessful merger bids. The evidence shows that increases in the probability of merger benefit the stockholders of target firms, and that decreases in the probability of merger harm the stockholders of both target and bidding firms. There is also evidence that the stock market forecasts probable merger targets in advance of any merger announcement, and because of this, previous studies have underestimated the market's reaction to merger bids.
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This paper investigates how different degrees of market power affect bank efficiency and stability in the context of developing economies. It sheds light on the competition-stability nexus by documenting and analyzing the complex interactions between a tripod of variables that are central for regulators: the degree of market power, bank cost and profit efficiency, and overall firm stability. The results show that an increase in the degree of market power leads to greater bank stability and enhanced profit efficiency, despite significant cost efficiency losses. The findings lend empirical justification to the traditional view that increased competition may undermine bank stability, and may bear significant implications for stressed banking systems in developing economies.
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In this paper the effect of failed mergers on the profitability of the bidder and the target is investigated. It is demonstrated that when firms produce differentiated products in Bertrand competition, the post-rejection expected profitability of both firms is adversely affected by the information revealed through the rejection. This is a reversal of the Hviid and Prendergast finding that the post-offer increase in the profitability of the target firms is further boosted by the information made available through the rejection. This reversal is the direct result of using upward sloping reaction curves, which are usually found in price-setting games. The prediction for the bidder firm remains unchanged; this will experience a fall in its profits in the case of merger failure, the degree of which will be even more extensive if the failed bid was hostile because of the information transmission involved.
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This paper enters the debate between market-power and efficient-structure explanations of the profit-structure relationship in banking by including direct measures of X-efficiency and scale efficiency in the analysis. Structural models of two market-power hypotheses and two efficient-structure hypotheses are expressed in testable reduced form profit equations. This methodology is applied to thirty cross-sections of 1980s banking data. These data are somewhat consistent with one of the market-power and one of the efficient-structure hypotheses. However, none of the hypotheses are overwhelmingly important in explaining bank profits, suggesting that alternative theories be pursued. Copyright 1995 by Ohio State University Press.
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We examine the effect of US branch banking deregulations on the entry size of new firms using micro-data from the US Census Bureau. We find that the average entry size for startups did not change following the deregulations. However, among firms that survived at least four years, a greater proportion of firms entered either at their maximum size or closer to the maximum size in the first year. The magnitude of these effects were small compared to the much larger changes in entry rates of small firms following the reforms. Our results highlight that this large-scale entry at the extensive margin can obscure the more subtle intensive margin effects of changes in financing constraints.
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We study the effects of structural changes in banking markets on the supply of credit to small businesses. Specifically, we examine whether bank mergers and acquisitions (M&As) and entry have “external” effects on small business loans by other banks in the same local markets. The results suggest modest positive external effects from these dynamic changes in competition, except that large banks may reduce small business lending in reaction to entry. We confirm bank size and age as important determinants of this lending, and show that the measured age effect does not appear to be driven by local market M&A activity. JEL classification: G21, G28, G34, E58, L89.
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The deregulation of financial services in the European Union (EU), together with the establishment of the Economic and Monetary Union, aimed at the creation of a level playing-field in the provision of banking services across the EU. The plan was to remove entry barriers and to foster both competition and efficiency in national banking markets. However, one of the effects of the regulatory changes was to spur a trend towards consolidation, resulting in the recent wave of mergers and acquisitions. To investigate the impact of increased consolidation on the competitive conditions of the EU banking markets, we employ both structural (concentration ratios) and non-structural (Panzar-Rosse statistic) concentration measures. Using bank-level balance sheet data for the major EU banking markets, in a period following the introduction of the Single Banking Licence (1997-2003), this paper also investigates the factors that may influence the competitive conditions. Specifically, we control for differences in efficiency estimates, structural conditions and institutional characteristics. The results seem to suggest that the degree of concentration is not necessarily related to the degree of competition. We also find little evidence that more efficient banking systems are also more competitive. The relationship between competition and efficiency is not a straightforward one: increased competition has forced banks to become more efficient but increased efficiency does not seem to be fostering more competitive EU banking systems. Copyright Blackwell Publishing Ltd and The University of Manchester 2006.
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We develop and test the Acquisition Probability Hypothesis, which asserts that rivals of initial acquisition targets earn abnormal returns because of the increased probability that they will be targets themselves. On average, rival firms earn positive abnormal returns regardless of the form and outcome of acquisition. These returns increase significantly with the magnitude of surprise about the initial acquisition. Moreover, the cross-sectional variation of rival abnormal returns in the announcement period is systematically related to variables associated with the probability of acquisition. In addition, rivals that subsequently become targets earn significantly higher abnormal returns in the announcement period.
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This paper analyzes how managerial control of voting rights affects firm value and financing policies. It shows that an increase in the fraction of voting rights controlled by management decreases the probability of a successful tender offer and increases the premium offered if a tender offer is made. Depending on whether managerial control of voting rights is small or large, shareholders' wealth increases or falls when management strengthens its control of voting rights. Management can change the fraction of the votes it controls through capital structure changes, corporate charter amendments, and the acquisition of shareholder clienteles.
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This paper tests the hypothesis that horizontal mergers generate positive abnormal returns to stockholders of the bidder and target firms because they increase the probability of successful collusion among rival producers. Under the collusion hypothesis, rivals of the merging firms benefit from the merger since successful collusion limits output and raises product prices and/or lower factor prices. This proposition is tested on a large sample of horizontal mergers in mining and manufacturing industries, including mergers challenged by the government with violating antitrust laws, and a ‘control’ sample of vertical mergers taking place in the same industries. While we find that the antitrust law enforcement agencies systematically select relatively profitable mergers for prosecution, there is little evidence indicating that the mergers would have had collusive, anticompetitive effects.
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This paper investigates the rationale behind interfirm tender offers by examining the returns realized by the stockholders of firms that were the targets of unsuccessful tender offers and firms that have made unsuccessful offers. Our results suggest that the permanent positive revaluation of the unsuccessful target shares [documented by Dodd and Ruback (1977) and Bradley (1980)] is due primarily to the emergence of and/or the anticipation of another bid that would ultimately result in the transfer of control of the target resources. We also find that the rejection of a tender offer has differential effects on the share prices of the unsuccessful bidding firms depending upon whether the tender offer process results in a change in the control of target resources. On the basis of these results we conclude that acquisitions via tender offers are attempts by bidding firms to exploit potential synergies, not simply superior information regarding the ‘true’ value of the target resources.
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Mergers for market power generally benefit outsider firms more than participating firms. Hence, outsiders should welcome such mergers between their competitors but, frequently, this is not the case. Under spatial competition some outsiders gain more than the participating firms but others might benefit less. Thus, if the number of admissible mergers is limited, firms may decide to merge to preempt rival mergers. This paper studies the incentives for preemptive merger by firms engaged in spatial competition.
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The focus of this paper is the effect of merger proposals on the expected profitability of the bidder and the target. The authors illustrate how an unsuccessful bid may increase the profitability of the target but reduce the profitability of the bidding firm, relative to the profitability of the firms before the merger offer. The profitability of a merger proposal is lowered due to learning from rejection. The authors use their theoretical model to explain empirical work on this issue. Copyright 1993 by Blackwell Publishing Ltd.
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Riklis Chair in Business and Associate Professor of Finance, The Ohio State University, and Assistant Professor of Finance, San Diego State University, respectively. We are grateful to Anup Agrawal, Warren Bailey, John Byrd, K. C. Chan, Larry Dann, Harry DeAngelo, Mike Fishman, Gerald Garvey, Rob Heinkel, Mike Jensen, Gregg Jarrell, Jon Karpoff, Mike Long, Francis Longstaff, Wayne Marr, David Mayers, Wayne Mikkelson, Patricia Reagan, Richard Ruback, Andrei Shleifer, Bill Schwert, Rex Thompson, and Mark Wolfson for useful discussions and comments, to participants at sessions at the American Finance Association and the Western Finance Association, and to the seminar participants at Harvard University, Indiana University, the Ohio State University, Southern Methodist University, the University of Rochester, and the Washington State University for helpful comments.
Article
This study examines the revaluation of shares surrounding the cancellation of mergers over the years 1976-85. The results are first categorized according to the party canceling the merger and then by subsequent merger activity. The results are as expected: target firms that become involved in merger activity, subsequent to the cancellation, experience positive cumulative prediction errors. Targets that do not become involved in subsequent merger activity have cumulative prediction errors that return to premerger announcement levels. These results do not vary when bidders or targets cancel the merger. Copyright 1989 by American Finance Association.
The worldwide equity premium: a smaller puzzle Handbooks in Finance: Handbook of the Equity Risk Premium
  • E Dimson
  • P Marsh
  • M Staunton
Dimson, E., Marsh, P., Staunton, M., 2008. The worldwide equity premium: a smaller puzzle. In: Mehra, R. (Ed.), Handbooks in Finance: Handbook of the Equity Risk Premium. Amsterdam, North-Holland.