The Announcement Effect of Bank Acquisitions on the Shareholder Value of Acquiring Banks

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The Announcement Effect of Bank Acquisitions on the

Shareholder Value of Acquiring Banks

Differences between acquisitions in Europe, Asia and the U.S.

Author: A.J. Kuik

University of Groningen

Faculty of Economics & Management and Organization Business Administration, MSc Finance

July 2008

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Abstract

This thesis examines the effect of bank acquisition announcements on the shareholder value of acquiring banks, using an event study with three different normal performance model specifications, ten alternative intervals and two types of benchmark indices. The data set is composed of 310 bank acquisitions, announced by 191 banks between January 1998 and December 2007. Methodologies used are the Student-t test, the Corrado rank test and a cross-sectional regression analysis. The study improves heteroscedasticity robustness of the tests by using GARCH for parameter estimation as an alternative for OLS/WLS techniques. Results show significant value gains in the days surrounding the announcement date and provide evidence that geographic market diversification, the financing method, the size of the acquiring bank, the relative deal size of the acquisition partners and the acquiring bank’s risk are factors driving the stock market reaction. Product market diversification, the payment method and the listing effect may be driving factors. However, there is lack of strong support for the relevance of these factors. The time effect, the pre-performance of the acquiring bank and the market-to-book value of the acquiring bank are unable to explain shareholder value effects. Several differences between announcement effects in Europe, South East Asia, more developed Asian countries and the U.S. are identified. Although acquiring banks earn significant positive abnormal returns in all four regions, value gains are shown to be the highest in South East Asia. Value gains appear to be similar in Europe and the U.S. In Europe, the listing effect, financing method and firm size of the acquirer may be driving factors. In Asia, the financing method may be a driving factor. In the U.S., the financing method and the relative deal size are explanatory factors.

A.J. Kuik Bosboom Toussaintstraat 6-III 1054 AR Amsterdam S1322842

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Preface

This thesis has been written as a final assignment of my MSc Finance at the Faculty of Economics & Management and Organization of the University of Groningen. My research started in December 2007 and was finalized in July 2008 in Amsterdam. The primary focus of my thesis is to analyze bank acquisition announcement effects on the shareholder value of acquiring banks and to identify deal and bank specific factors driving these effects. Furthermore, differences between bank acquisition announcement effects and driving factors in different geographic regions are analyzed.

I have chosen to write my thesis on this topic mainly due to two reasons. First, during my internship at ABN AMRO in the autumn of 2007, I experienced working at a bank subject to a bidding war between Barclays and a consortium of the Royal Bank of Scotland (RBS), Fortis and Banco Santander. I found it very interesting whether the eventual acquisition would actually be in the interest of the shareholders of the acquiring bank(s). Second, literature does not investigate the value effects of bank acquisitions in Asia. I thought that examining the effects in this region and comparing it with the effects in Europe and the U.S. would be a very interesting contribution to the literature.

I would like to express my gratitude to my supervisor, Ms. Thi Thu Tra Pham. She has provided me with helpful insights, guidance and critical reflections during my research process. I would also like to thank my family, my girlfriend and my friends for their help and support. I enjoyed writing this thesis, it has been an enriching experience.

Arnoud Kuik

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1 Introduction

Over the last two decades, the banking and financial services industry has experienced profound changes. One of the most important effects of this restructuring process has been an increase in consolidation activities. Starting in the U.S. in the 1980s, a wave of bank mergers reached Europe in the 1990s. In the second half of the 1990s, merger activity in the global financial sector reached unprecedented heights with approximately 900 transactions per year before slowing down during the period between 2001 and 2005 [Valkanov and Kleimeier (2007)]. Most of the studies examining the effects of bank acquisitions focus on the U.S. banking sector and to a lesser extent on the European banking sector. Vander Vennet (1998) observed that the market reaction of European bank mergers is seldom studied because many of the partners are not publicly traded. The effects on the banking sector in Asia in this respect are even less well documented. Buch and DeLong (2004) document that there were 129 bank merger transactions in the 1978–1989 period, as opposed to 829 bank mergers in the 1990-2001 period. This is a significant increase, which makes it interesting to examine the value effects following bank acquisitions in this region. Also, much has been documented on Asia’s banking crisis of 1997-1998. As will be discussed in section 2.3, this crisis had a significant impact on merger and acquisition activity in the financial sector.

Studies on this subject focus on the question whether bank mergers and acquisitions have created or destroyed shareholder value. Literature seems ambiguous about the creation of value for acquiring banks, as most studies conclude that acquiring banks earn significant negative abnormal returns, whereas other studies conclude acquiring banks earn insignificant or even significant positive abnormal returns. Most of the studies do not provide in depth analyses of factors that may determine or explain the value creation process. However, the market appears to value especially geographic and product market focusing acquisitions of relatively small target banks. Several important differences between value effects in different regions have been identified in the literature. The U.S. experience therefore can not be automatically applied to the European and the Asian environment, where one can observe product expansion in a somewhat less restricted environment.

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Ten potential driving factors will be analyzed by comparing sub samples and by conducting a cross-sectional regression analysis to test for significant relationships. The results may eventually indicate that the stock market reaction to merger and acquisition announcements in this sector can at least be partly forecasted and that an appropriately designed merger and acquisition strategy may be able to generate shareholder value. Finally, the third part of this paper combines the above analyses to determine what the differences in shareholder value effects and the role of the identified factors are between bank acquisitions in 17 European countries (EU-15, Norway and Switzerland), 10 Asian countries, and the U.S. For the value effects analysis, the Asian sample will be further divided in a South East Asian sample and a more developed Asian sample to examine whether value effects differ between these two groups of countries. For the factor analysis in Asia, the total Asian sample will be used. The study of market reactions in different regions is relevant with respect to assessing the degree of financial market development and market integration. Finding no differences would allow us to apply the knowledge we have to bank mergers and acquisitions in various regions. It would also suggest the existence of an integrated global market where participants react the same way when presented with similar situations. On the other hand, finding differences in valuation effects would imply that stock markets are not integrated (which permits investors to pursue strategies of diversification). Most differences may arise from different regulatory and cultural settings.

The data set consists of 310 bank acquisitions announced by 191 banks in Europe, Asia and the U.S. between January 1998 and December 2007. By examining recent data, conclusions can be drawn about today’s stock market. By doing this, this paper contributes to the available literature on this subject. While many studies measure performance using only one type of benchmark index, this paper will increase robustness by measuring performance relative to general market indices and country-specific bank sector indices. Another addition will be to estimate abnormal returns by using the GARCH estimation method, as a more accurate alternative for WLS/OLS techniques. Several potentially determining factors will be examined that have not been examined before. These factors are the listing effect, the financing method effect and the market-to-book ratio of the acquirer. The number of studies examining the impact of the time effect, firm size of the acquirer and the pre-merger performance of the acquirer are rather limited. Furthermore, there are no studies examining the differences between determining factors across regions. While for the U.S. there is extensive empirical evidence on the value effects of bank mergers and acquisitions, the empirical evidence remains limited for Europe. Finally, this paper is the first to examine the impact on acquiring banks in Asia.

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2 Literature review and hypothesis development

This section will discuss the theoretical background of the announcement effect of bank acquisitions on the shareholder value of acquiring banks. It will also provide a review of the empirical evidence on this subject and the research hypotheses. First, several theories will be discussed why banks acquire other banks and how those acquisitions can have an impact on shareholder value. Second, theories about characteristics of the acquisition and the acquiring banks will be discussed that may determine the value effects. Third, the characteristics of and differences between bank acquisitions in Europe, Asia and the U.S. will be discussed. This way, theories on value effects and possible determinants can be related to geographic regions. Fourth, previous empirical studies on this subject will be reviewed and their results discussed. In the final part of this section, the discussed theories and empirical results will be elaborated on to formulate the research hypotheses.

2.1 Bank acquisitions and shareholder value

Mergers and acquisitions are important ways for firms to reallocate resources and execute strategies. Transactions create value if the consolidated post-merger firm is more valuable than the simple sum of the two separate pre-merger firms. The banking sector differs from other sectors because it is closely tied to the general economic conditions in a country through the provision of credit to firms in other sectors. As a result, the banking sector is a regulated sector. In many countries, banks are protected from competitive pressures. In order to prevent a banking system crisis caused by a domino effect, governments and central banks often feel obligated to support a failing bank [Lensink and Maslennikova (2007)]. Over the past two decades, the banking sector has experienced an unprecedented level of consolidation. Mergers and acquisitions among large financial institutions have taken place at record levels.

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been a motivation for several bank acquisitions [Akhavein, Berger and Humphrey (1997)]. If higher revenues can be generated without the commensurate costs, profit efficiency will improve [Piloff and Santomero (1998)]. Financial synergies may occur as a result of a lower cost of internal financing, increased debt capacity of the combined firm, the ability of the firm to acquire new assets rather than building up capacity on its own, and economies of scale, which can be achieved in floatation and transaction cost of securities [Copeland et al. (2003)]. Merger related gains can also stem from increased market power. This is a strong motive when competitive pressures in an industry are high. Deals among banks with a substantial geographic overlap reduce the number of firms in markets where both banks compete. The market share of the surviving bank will increase and the market will be subject to reduced competition. Increased market power opens doors to earn higher profits, increased capital efficiency and lower deposit rates. Finally, bank mergers may create value by raising the level of bank diversification. Both geographic market diversification and product market diversification may provide value by stabilizing returns. Reduced earnings volatility can raise shareholder value because the expected value of bankruptcy costs may be reduced, expected taxes paid may fall resulting in a higher expected net income (in case of a convex tax schedule), earnings may increase from business areas where customers value bank stability and/or levels of risky but profitable activities may rise, without additional capital being necessary. If a bank acquires another bank based on one of the above motives with the intention to enhance shareholder value, both the acquiring bank and the target bank are expected to generate positive abnormal returns.

A second reason why a bank would acquire another bank is that mergers and acquisitions can be part of a corporate strategy, because organic growth is not possible or very expensive due to requirements of speed, limits in acquirer capabilities or other barriers. The growth opportunities signaling hypothesis, formalized by McCardle and Viswanathan (1994) and Jovanovic and Braguinsky (2002), state that firms acquire other firms when they have exhausted their internal growth opportunities. Consolidating an industry by purchasing several smaller players can generate large economic profits. Many other strategic themes rely on mergers and acquisitions to create value. If a firm wants to enter a market with an innovative product but lacks the capabilities to develop the product fast enough, or when a firm wants to enter a new geographic market, an acquisition may be the best way to achieve this goal [Koller, Goedhardt and Wessels (2005)]. If an acquisition is part of a bank’s corporate strategy, the acquiring bank and the target bank are expected to generate positive abnormal returns following the acquisition announcement.

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costs to investors are occurred. Obviously, acquiring another bank is one way for managers to increase firm size and as a result enjoy greater size-related personal benefits. The relation between firm size and compensation levels is also consistent with markets for managerial labor in which the largest firms offer the highest compensation of highly skilled executives because their managerial product is higher within such firms [Rosen (1992), Himmelberg and Hubbard (2001)]. The managerial product will probably increase after a merger since the organization is larger, more complex and more is demanded from the manager [Demsetz (1995)]. However, managerial compensation should increase with the expected value gains from the merger. If an acquisition is the result of an agency problem, the target bank is expected to earn positive abnormal returns and the acquiring bank is expected to earn negative abnormal returns following the acquisition announcement.

The foregoing array suggests that depending on the motives for a bank acquisition, shareholders of the acquiring bank are likely to experience either an increase or decrease in their wealth following a bank acquisition announcement. In this paper, financial markets are expected to be able to value firms rather accurately. Therefore, changes in the market value of the firm are used as a proxy for merger and acquisition gains. The market value of the bank is inferred from the current stock returns of its securities. To determine the impact of bank acquisition announcements, empirical testing is necessary.

2.2 Factors determining the impact on shareholder value

In this section, 10 deal and bank specific factors will be discussed that may have a significant impact on the performance of acquiring banks in the days surrounding the acquisition announcement. Several theories will be presented to create a better understanding and to form expectations about whether these factors represent potential sources of value gains.

Geographic market diversification

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returns, the barrier to entry theory predicts positive abnormal returns for the acquiring firm [Brewer, Jackson, Jagtiani and Nguyen (2000)]. Domestic acquisitions on the other hand tend to concentrate the acquirer’s existing market power or brand recognition and allow for greater cost efficiency [Cornett et al. (2003)]. The potential for cost savings and thus synergy potential may be greater if the acquiring bank and the target bank operate in the same economic environment. Furthermore, the market overlap hypothesis of Berger and Humphrey (1992) and Rhoades (1993) states that deals where the activities of the involved parties have a larger geographical overlap are more likely to bring improvements in productive efficiency. One of the implications of an integrated global financial market is that the benefits of geographical diversification are rather limited [Elton, Gruber, Brown and Goetzman (2003)]. Corporate governance variables (such as CEO share and option ownership and a smaller board size) tend to be less effective in diversifying acquisitions than in focusing acquisitions. This would suggest that geographic market diversifying acquisitions would earn negative average abnormal returns. Finally, cultural and language differences between countries as well as strong nationalistic feelings may cause problems [Beitel and Schiereck (2001)].

Product market diversification

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of scale [Clark (1988)]. Furthermore, shareholders are expected to value a financial institution offering a wide array of services as a good thing [Lensink and Maslennikova (2007)].

Method of payment

Assuming that a bank is not capital constrained, the real issue regarding the method of payment is whether the risks and rewards of the deal should be shared with the target bank’s shareholders. When paying with cash, the acquirer’s shareholders carry the entire risk of capturing synergies and paying too much. If the acquirer pays with shares, the target’s shareholders assume a portion of the risk. Furthermore, the optimal capital structure should be considered. It is important whether a firm can raise enough cash through a debt offering to pay for the target entirely with cash. If the capital structure of the combined entity cannot take the debt from the original acquisition, the acquirer needs to consider paying partially or fully with shares, regardless of desired risk taking [Koller, Goedhardt and Wessels (2005)]. Several hypotheses regarding a predictable relation between the method of payment and acquirer’s returns have been suggested in the existing literature.

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prefer to use cash to finance investment projects that expand firm size but simultaneously reduce firm value (when all net positive value projects have been exhausted). This hypothesis argues that especially empire-building managements would rather make acquisitions paying with cash than increase payout to shareholders. The agency costs associated with the use of these free cash flows lead to the conclusion that returns following announcements of acquisitions paid with cash may be lower than returns following announcements of acquisitions paid with shares. Alternatively, Hawawini and Swary (1990) state that the amount of cash offered for a target should be positively related to abnormal acquirer’s returns due to an agency effect, stating that cash acquisitions divert free cash flow away from potential discretionary spending.

Time effect

DeLong and DeYoung (2007) argue that in the U.S., mergers of large, publicly traded banks in the 1980s and 1990s were difficult to plan, execute, and value because these mergers were in many ways a new phenomenon. Acquiring banks had no experience with planning and executing these large and complex transactions, and capital markets had no experience evaluating these new kinds of deals. They further argue that such circumstances change due to information spillover, which implies that banks will learn how to better plan and execute transactions by participating in transactions themselves, and by observing previous mistakes and successes of other acquiring banks. The authors similarly hypothesize that investors will learn how to better evaluate bank mergers by observing previous bank acquisitions. If the above is correct, more recent acquisitions are expected to generate more positive returns for acquiring banks.

Listing effect

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competitive auction, the price to be paid is generally lower. A third theory states that an acquisition announcement which reveals new information about future perspectives of the target firm leads to a share price increase before completion of the transaction, a price to be paid by the acquiring firm. As private targets have lower publicity, transactions involving private targets are expected to generate higher returns for the acquiring firm’s shareholders. In sum, private information is expected to be a greater source of value creation in acquisitions of private targets than in acquisitions involving public targets. Because of a lack of bargaining power, private firm discount, and lower publicity on acquisitions involving private targets, acquirer’s can extract a larger percentage of the wealth gains. Therefore, acquisitions of private firms are expected to yield higher returns for the acquiring firm’s shareholders.

Financing method

A capital increase is defined as a method of deal financing whereby a bank issues new shares, thus increasing its capital. Financing an acquisition externally is more costly than financing it with internally generated funds, so firms may invest in more positive net present value projects when they have excess cash. It is also possible that as more free cash flow becomes available, managers may choose to acquire banks to suit their own goals [Jensen (1986)]. This agency-based view implies that management will only commit themselves to less and more rational acquisitions, based on factors likely to enhance shareholder value when external capital has to be attracted to finance the deal. Therefore, acquisitions financed by a capital increase are expected to yield a higher return than acquisitions financed internally.

Firm size of the acquirer

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and Swary (1990) post the absolute size hypothesis: based on a bank’s average cost function, smaller acquirers are supposed to realize higher gains from economies of scale.

Relative deal size

Larger transactions tend to be more complex and possible synergies tend to be less transparent to judge upon by the capital markets. Large transactions are therefore expected to be valued less than small or medium sized transactions that represent a limited risk for acquiring banks, although scale effects may be larger. The capital market does not appreciate very large transactions, where substantial synergies might be realized but where it is also possible that integration complexity hinders or even prevents acquiring banks to successfully capture these synergies. In sum, the acquisition of targets that provide for sufficient synergies but still are of manageable size should have a positive impact on value creation [Beitel and Schiereck (2001), Beitel et al. (2004)].

Pre-performance of the acquirer

Pre-merger performance of the acquiring bank and the target bank may influence the market reaction and is likely to have an impact on the post-merger performance of the combined entity. Akhavein et al. (1997) suggest acquiring banks may use acquisitions as an excuse to improve efficiency within their current organizations, and the banks that benefit most from mergers are the banks that are least efficient at the outset. If investors believe underperforming partners will benefit most from a merger, they will bid up the stock price of such partners. Therefore, underperforming acquiring banks are expected to create more value and to generate higher abnormal returns than strong performing acquiring banks following an acquisition announcement.

Market-to-book ratio of the acquirer

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2.3 Bank acquisitions in different geographic regions

In section 2.1 and 2.2, theories on the acquiring bank’s shareholder value effects and potentially determining factors have been discussed. The research will be extended by comparing the value effects and factors across three geographic regions: Europe, Asia and the U.S. In this section, characteristics of the financial systems in these regions will be discussed. This will help to understand how market reactions and the explanatory power of the factors may differ across regions.

The banking industry worldwide has changed significantly over the last decades. Bank mergers have soared in the 1990s. Initially, most mergers occurred in the U.S., but in the second half of the 1990s, Europe and Japan caught up [Scholtens and de Wit (2004)]. Especially the differences between U.S. and European financial systems have been analyzed and are found to differ to a great extent. The main distinctive features are corporate governance and corporate transparency, the role of banking institutions in firm finance, and the depth and width of financial markets and innovations [Barth, Nolle and Rice (1997)]. There is a wide range of economic literature that can be used to explain the differences and similarities between the reaction patterns in different regions. A first theory is based on finance theory and investigates the degree of market segmentation or market integration [Bekaert and Harvey (2000) and Henry (2000)]. Similarities in reactions to bank acquisition announcements would suggest there is an integrated global financial market where market participants will react the same way in identical situations. However, differences in reactions to bank acquisition announcements would suggest financial markets are segmented. A second theory focuses on financial development and the maturity of the markets and their institutions. Bank acquisition announcements are expected to have the highest impact in highly developed markets, as new information has a higher impact on stock prices in such markets [Fama (1991)]. In sum, different types of literature point in different directions as one theory suggests that markets in different regions will react identically and one theory suggests that markets in different regions will react differently. The remainder of this section will discuss characteristics of the financial systems in these regions.

2.3.1 Europe

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America and South East Asia [Campa and Hernando (2006)]. The financial consolidation was furthermore driven by technological process, other forms of ongoing national and European deregulation and harmonization, increasing shareholder pressure, the ongoing implementation of the European Monetary Union (EMU) in 1999, the introduction of the Euro in 2002, ongoing globalization, and increasing competition from within the sector and from non-bank financial intermediaries [Belaish, Kodres, Levy et al. (2001), Smith and Walter (1998) and Beitel and Schiereck (2001)]. All these factors together changed the structure of the European banking sector as a whole and are expected to continue reshaping the European financial landscape in the years to come [Morgan Stanley (2003)]. Despite these changes in Europe through mergers and acquisitions, only little research has been contributed to this field.

The structures of the financial systems in Europe may have some implications for theories on factors that may explain shareholder value effects following bank acquisition announcements. First, financial deregulation and the removal of barriers made it possible for European banks to utilize economies of scope and benefit from geographic market diversification. Second, cross-product transactions seem to be very popular for European banks to replace interest related income with less capital intense commission income and may be strengthened by a disintermediation trend in the financial sector in Europe. Third, the perception of stock undervaluation by bank managers may not drive the payment choice in Europe. Fourth, regional differences are also expected to account for different time effects. Theories state that announcement effects of acquiring banks in Europe may be on their way to develop into the direction known from prior U.S. research, claiming more recent deals may not be value creating on a net aggregate basis. On the other hand, various regulatory and political efforts have tried to harmonize the European banking market; presumably eliminating some of the hurdles banks otherwise would have faced in cross-border mergers and acquisitions within Europe. This may have an impact on the abnormal returns for acquiring bank’s shareholders.

2.3.2 Asia

Calvo (1998) reports that financial crises in emerging markets evolve through complicated interactions between domestic financial sectors, international lenders and national monetary and fiscal authorities. The financial crisis in Asia of 1997-1998 followed several years of large foreign financial capital inflows intermediated by the domestic banking system. Such inflows allowed lending and aggregate output to grow without being constrained by domestic savings. The crisis countries suffered tandem banking and currency crises that produced sharp reductions in economic growth and subsequent ongoing financial distress [Dekle and Kletzer (2001)]. The crisis strengthened two interesting developments: changes in corporate governance structures and consolidation in the financial sector.

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towards the Anglo-American shareholder model. These changes are also the result of the growth of international capital markets, which is driving a demand for common standards. Allen (2000) reports that while there may be variation in implementation, there is a convergence in policy direction, and this convergence has grown over time.

In Asia, a banking consolidation wave occurred in reaction to the financial crisis [Berger and DeYoung (2001)]. Bank mergers were mostly a government-led process, motivated by the need to strengthen capital adequacy and the financial viability of many smaller, often family-owned banks. Moreover, several countries reformed existing bank regulations to permit foreign banks to purchase domestic banks. The result was that most emerging economies in Asia increasingly looked to foreign banks to provide the capital, technology and know-how. The restructuring processes led to a drop in the number of banks and to a fall in the degree of concentration [Gelos and Roldós (2004)]. Berger, DeYoung, Genay and Udell (2000) assert that since only the largest and most efficient banks are able to enter and succeed in foreign markets over a sustainable period, global acquisitions may enhance global banking efficiency. Cross-border bank consolidation should therefore create a sounder and less crisis-prone banking sector, thereby providing some protection against another Asian financial crisis.

The structures of the financial systems in Asia may have some implications for theories on factors that can explain shareholder value effects following bank acquisition announcements. First, a time effect may arise as motives for acquisitions following the financial crisis may be the result of government intervention, or the need to strengthen capital adequacy or the financial viability of banks. This may have resulted in lower returns for acquiring bank’s shareholders in years directly following the crisis than in the years thereafter, when motives may have been more rational. Furthermore, although corporate governance in Asia is converging towards the corporate governance being practiced in Europe and the U.S., the current practices are less extensive and the implementation of new standards faces limitations. Therefore, the impact of firm size of the acquiring bank on shareholder value is expected to be different in Asia and more similar in Europe and the U.S.

2.3.3 U.S.

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and through approval or disapproval of individual mergers and acquisitions. Regulatory review in the U.S. attempts to prevent consolidation in which excessive increases in risk are expected. Regulators also prevent in-market transactions if the increases in concentration are expected to result in excessive increases in market power. Finally, transaction restrictions may be used to promote other policy goals. On the other hand, the government may encourage consolidation. During financial crises, the government may provide financial assistance or otherwise aid in the consolidation of troubled financial institutions [Berger et al. (1999)]. Restrictions on banks’ ability to expand geographically were relaxed in the 1980s and early 1990s in the U.S. with a series of removals of restrictions on intrastate and interstate banking, including the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, with permitted interstate banking in almost all states. This act was a response to the Douglas Amendment of 1956, which prohibited interstate bank mergers unless expressly authorized by state stature. This deregulation provided banks the opportunity to increase the size of their geographic market. The removal of these constraints forced inefficient banks to be more efficient by acquiring other institutions, by being acquired or by improving management practices internally. The result was an acceleration of the financial consolidation. Another major change in regulation was the repeal of the Glass-Steagall Act that forbade the consolidation of deposit firms and securities corporations [Walter (2004) and Yu (2002)]. Combined with the disintermediation trend in the financial sector, product-diversifying deals are expected to account for a large number of deals in the U.S. sample. Because capital markets are highly developed in the U.S., it may be relatively easy to acquire external capital in this region. This means the proportion of externally financed mergers and acquisitions are expected to be relatively high in the U.S.

2.4 Empirical evidence on the announcement effect of bank acquisitions

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2.4.1 Empirical evidence on bank acquisitions and shareholder value

The first line of research focuses on the stock market reaction on the valuation of the banks involved upon the announcement of an acquisition. A number of studies have conducted such an analysis using different samples covering the U.S. and European banking sectors. The literature uses the event study methodology to analyze stock market performance around the announcement of the acquisition to obtain excess returns to shareholders. Findings of these studies are mixed (see also Rhoades (1994) and Berger et al. (1999) for extensive surveys).

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Europe and the U.S. and found that the abnormal returns for target shareholders were significantly positive and for acquiring shareholders significantly negative.

In contrast to the studies reviewed above, several studies examining bank acquisition announcements found that acquiring banks experience significant positive abnormal returns in the days surrounding the announcement date. Cornett and De (1991a) documented significant positive announcement period abnormal returns for both acquiring banks and target banks. Cornett and De (1991b) examined the role of medium of payment in bank acquisitions and found that acquiring banks experienced significant and positive abnormal returns on the announcement day and in the two days surrounding the announcement. Cybo-Ottone and Murgia (2000) examined bank acquisition announcements in Europe. They document that the combined performance of the acquirer and the target is significantly positive and that bank mergers create value for target banks. Acquiring banks are found to earn significant positive abnormal returns when using general market indices as benchmark. Lensink and Maslennikova (2007) provided an analysis of value gains to acquirers in Europe. They presented the first application of the Fama-French three-factor model to an event study analysis. The study also documented positive and statistically abnormal returns for the aggregate acquisition sample. Finally, there are studies analyzing the impact of bank acquisition announcements on shareholder value which found that acquiring banks do not experience any significant abnormal returns in the period surrounding the announcement date. Cybo-Ottone and Murgia (2000) found insignificant abnormal returns for European acquiring banks when using comparable bank sector indices as benchmark. This is in contrast to their findings mentioned above using general market indices. Beitel and Schiereck (2001) studied the value implications on European acquiring banks and firms in associated sectors, such as insurance and securities firms. They showed evidence that the effects for the shareholders of acquiring banks are insignificant. Due to the significant positive effect for the targets, on an aggregate basis mergers and acquisitions of European banks still create value. Scholtens and de Wit (2004) examined the short-term value effects of large European and U.S. bank mergers to both the target and acquiring banks’ shareholders. Measuring performance vis-à-vis the general market and the banking sector, they found evidence that mergers result in small positive abnormal returns and that target banks realize significantly higher returns than acquirers. Beitel et al. (2004) investigated drivers of excess returns to the shareholders of the targets, the acquirers, and to the combined entity of the acquirer and the target. They showed that acquiring banks do not create value, and target banks and the combined entity do create value.

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2.4.2 Empirical evidence on factors determining the impact on shareholder value

The second line of research focuses on potentially determining factors which may explain market reactions to bank acquisition announcements. These analyses provide some interesting conclusions. The conclusions of prior literature on these factors will be discussed in tandem.

Many studies examine the impact of geographic market diversification. Most of them conclude this is a significant factor and that capital markets value focusing deals more than diversifying deals. This finding provides support to the view of diversification skeptics. The studies of Houston and Ryngaert (1994), Cybo-Ottone and Murgia (2000), Beitel and Schiereck (2001), DeLong (2001a), Cornett et al. (2003) and Beitel et al. (2004) found that geographic focusing acquisitions result in significantly higher abnormal returns than geographic diversifying acquisitions. In contrast, some studies conclude the impact of geographic market diversification is insignificant. The studies of DeLong (2003), Campa and Hernando (2006) and Schmautzer (2006) conclude that geographical diversification is not an explanatory variable for the performance of acquiring banks.

Most of the studies examining geographic market diversification also examined the impact of product market diversification and found similar results. Cybo-Ottone and Murgia (2000) found that product diversification of banks into insurance result in significant positive abnormal returns. Mergers and acquisitions with securities firms did not gain a positive market's expectation. The studies of DeLong (2001a), Cornett et al. (2003), Beitel et al. (2004) analyzed the impact of product market diversification on market reactions to bank acquisitions and found that the market reacts negatively to the announcements of mergers that diversify their activities. On the other hand, several studies conclude product market diversification is not an explanatory factor determining abnormal returns for acquiring banks. The studies of Beitel and Schiereck (2001), DeLong (2003) and Campa and Hernando (2006) found this variable to be of no significance and conclude product diversification does not determine the performance of acquiring banks.

Four studies examined geographic and product market diversification simultaneously, by dividing their sample into four groups, classified according to activity and geographic similarity or dissimilarity. Most of these studies found that focusing deals, those with the greatest potential of cost savings, create value upon announcement. DeLong (2001a) found that mergers that have a geographic focus and are product diversifying and mergers that have a product focus and are geographically diversifying result in significant negative returns for the acquiring bank. DeLong (2001b) showed that mergers that focus both activity and geography enhance stockholder value while the other types do not create value. Cornett et al. (2003) state corporate governance variables (such as CEO share and option ownership, and board size) in the acquiring bank are less effective in diversifying acquisitions than in focusing acquisitions. Lensink and Maslennikova (2007) showed strong statistical evidence that all types of domestic deals as well as bank-to-bank cross-border deals create shareholder value. Gains to cross-border diversifying deals are insignificant.

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et al. (1997), DeLong (2001a, 2001b, 2003) and Beitel et al. (2004) conclude that the method of payment is not an explanatory variable and that investors do not value payments with cash more than payments with shares. Only two studies found the method of payment to be a factor with explanatory power. Houston and Ryngaert (1994) found that a method of payment that reveals positive information about the acquirer or the synergies likely to be created by the merger to be a characteristic that the market perceives as most valuable. This means an increased use of shares results in more negative returns. Cornett et al. (2003) provided evidence that acquisitions paid with cash result in significant positive average abnormal returns, acquisitions paid with shares result in significant negative average abnormal returns and that the difference is significant.

Conclusions about the significance of the time effect are mixed. Houston and Ryngaert (1994) and Houston et al. (2001) showed that returns in the U.S. have become less negative in more recent years, identifying a shift in time. Beitel and Schiereck (2001) also identified a shift in time, as European acquiring banks in large deals experienced significant negative cumulative abnormal returns since 1998, whereas they did not between 1985 and 1997. They state that the announcement effects of acquiring banks are on their way to develop into the direction known from prior U.S. research.

Two studies examined the significance of the acquiring bank’s firm size. Subrahmanyam et al. (1997) analyzed the impact of the acquiring bank’s firm size, measured by the market value of common equity at the end of the year preceding the bid. They found abnormal returns to be negatively related to the acquirer’s absolute size. Cornett et al. (2003) used the natural logarithm of the book value of the total assets of the acquiring bank to show that the size of the acquiring bank is not a significant variable in explaining the abnormal returns.

The impact of relative deal size is widely discussed and measured in differing ways. Several studies found this variable to be significant. Subrahmanyam et al. (1997) found relative size to be negatively related to the abnormal returns. This suggests that abnormal returns are more negative as the target’s size becomes more material. Cross-sectional analysis in the study of Beitel and Schiereck (2001) showed that transactions with targets of manageable size seem to have a significant positive impact on value. The ‘positive’ effects of Europe, not significantly negative returns for their entire sample, may thus be driven by the medium-sized transactions. DeLong (2001b), however, provided evidence that abnormal returns upon a merger announcement increases with the relative size of the target to the acquirer. DeLong (2003) found the relative market value to be a significantly negative variable influencing the abnormal returns for acquiring banks. In contrast to these studies, some studies found the impact of relative deal size to be insignificant. Cornett and De (1991a), Beitel et al. (2004), Campa and Hernando (2006) and Valkanov and Kleimeier (2007) found that this variable does not have explanatory power on acquiring bank’s returns.

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In sum, the prior literature identifies geographic and product market diversification, method of payment, the time effect, acquiring bank’s firm size, relative deal size and pre-merger performance of the acquiring bank as factors that may determine the value gains of acquiring banks. This indicates that the stock market reaction of bank acquisition announcements can at least be partly forecast and that an appropriately designed acquisition strategy may be able to generate shareholder value.

2.4.3 Evidence on bank acquisitions in different geographic regions

The third line of research focuses on the differences in stock market reactions and the role of determinants between geographic regions, most notably the U.S. and Europe. Turning to studies with a U.S. focus first, acquiring bank’s abnormal returns are usually found to be negative [Houston and Ryngaert (1994), Subrahmanyam et al. (1997), DeLong (2001a, 2001b), Houston et al. (2001), Anderson et al. (2003), Cornett et al. (2003), DeLong (2003), DeLong and DeYoung (2007) and Valkanov and Kleimeier (2007)]. Acquiring bank’s abnormal returns in Europe are usually found to be zero [Cybo-Ottone and Murgia (2000), Beitel and Schiereck (2001), Scholtens and de Wit (2004), Beitel et al. (2004), or even positive [Cybo-Ottone and Murgia (2000), Lensink and Maslennikova (2007) and Valkanov and Kleimeier (2007)].

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compared international cross-border bank mergers and found that while country-specific factors have an impact on the acquiring bank’s value creation, their effect is more pronounced for target banks. More specifically, the comparative advantages of the U.S. and the U.K. at importing financial institutions mergers and acquisitions and the similarity in degree of economic development between the acquirer’s country and the target’s country positively influence target value creation. Valkanov and Kleimeier (2007) compared returns in the European market and in the U.S. market. They found that the abnormal returns for target shareholders were significantly positive and for acquiring shareholders significantly negative in the U.S. sample. For the European sample however, the abnormal returns are found to be significantly positive for the target shareholders as well as for the acquiring shareholders.

The above findings suggest there are significant differences between the value gains experienced by shareholders of acquiring banks in the U.S. and in Europe. Overall, results seem to point out that bank acquisition announcements destroy shareholder value of acquiring banks in the U.S. and either create or do not influence shareholder value in Europe. Most authors explain these differences as a result of different regulations, languages and cultures, and financial systems and structures.

None of the studies reviewed above provides a comparison of the impact of deal and bank specific factors across geographic regions. However, when comparing the results of the studies examining the impact of factors in either Europe or the U.S., evidence can be found that two factors identified from U.S.-focused research have significant explanatory power in the European market as well. These factors are geographic and product market diversification. On the other hand, the role of method of payment seems to be insignificant in both the U.S. and Europe. The findings regarding the impact of relative deal size remain mixed. The only difference between the U.S. and Europe appears to be the relevance of the time effect, as Beitel and Schiereck (2001) found it to be a significant factor for Europe, and Houston et al. (2001) found it to be an insignificant factor for the U.S. The listing effect, financing method, firm size of the acquiring bank, pre-performance of the acquiring bank and the market-to-book ratio of the acquiring bank were examined for either one or none of the geographic regions. An overview of the factor analyses for both regions is provided in Table 1. An extensive survey of the reviewed literature is provided in Table 2.

Table 1

Overview of the factor analyses in Europe and the U.S.: proportion of the studies that found the factor to be significant

Var1 = geographic market diversification, var2 = product market diversification, var3 = payment method, var4 = time, var 5 = listing target, var6 = financing method, var7 = firm size acquirer,

var8 = relative deal size, var9 = pre-performance acquirer, var10 = market-to-book ratio acquirer

Var1 Var2 Var3 Var4 Var5 Var6 Var7 Var8 Var9 Var10

U.S. 4/4 3/3 2/7 0/1 - - 1/2 2/3 - -

100% 100% 29% 0% - - 50% 67% - -

Europe 3/4 2/4 0/1 1/1 - - - 1/3 - -

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Table 2

Survey of the reviewed literature

Study Focus Data Research

Period

Research Method

Event

Window AAR and CAAR Acquirers Conclusions

Cornett and De (1991a)

U.S. Daily stock prices of 152 interstate bank mergers 1982-1986 Event study; market and risk adjusted model and regression analysis using OLS [-15,+15] [0] [-1,0] 0.7%*** 0.6%***

Bank mergers increase shareholder value of both acquiring and target banks. Positive signals concerning capital quality and synergies may be determining factors. Financing method, potential acquisition competition, relative deal size and target bank failure are not significant factors.

Cornett and De (1991b)

U.S. Daily stock prices of 132 interstate bank mergers 1982-1986 Event study; market and risk adjusted model [-5,+5] [0] [-1] [-1,0] 0.9%*** 0.1% 0.9%***

Bank mergers increase shareholder value of both acquiring and target banks. The medium of payment (cash, shares or a combination of cash and shares) is insignificant. Houston and

Ryngaert (1994)

U.S. Daily stock prices of 153 large bank mergers 1985-1991 Event study; market and risk adjusted model and regression analysis using OLS

[-4,+1] a [-4,+1] -2.3%*** Bank mergers increase shareholder value of target banks, decrease shareholder value of acquiring banks and have no significant impact on shareholder value of the combined entities. Total returns have been higher in more recent years. Acquirer profitability, operations overlap and financing method are determining factors. Subrahmanyam,

Rangan and Rosenstein (1997)

U.S. Daily stock prices of 225 large bank acquisitions 1982-1990 Event study; market and risk adjusted model and regression analysis using OLS [-15,+15] [-1] [0] [1] [-1,0] [-1,+1] -0.3%** -0.3%*** -0.3%** -0.6%*** -0.9%***

Bank mergers destroy shareholder value of acquiring banks. The proportion of outside directors, the number of outside directors and the proportion of ownership held by outside directors are

significant factors. Governance structures of banking firms are significantly different from those of non banking firms. Cybo-Ottone

and Murgia (2000)

Europe Daily stock prices of 54 large bank mergers in 14 countries 1988-1997 Event study; market and risk adjusted model and regression analysis using OLS [-20,+20] [-1,+1] b [-1,0] [-2,+2] [-5,+5] [-10,+10] [-20,+20] -0.2% -0.2% 0.2% -0.2% 0.1% 1.0%

Bank mergers increase shareholder value of target banks and combined entities, and have no significant impact on shareholder value of acquiring banks. Domestic bank to bank deals and product diversifying deals generate highest positive returns. European and U.S. bank mergers are different.

Beitel and Schiereck (2001)

Europe Daily stock prices of 98 large bank mergers in 17 countries 1985-2000 Event study; market and risk adjusted model and regression analysis using OLS [-20,+20] [0] [-1,+1] [-1,0] [-2,+2] [-5,+5] [-10,+10] [-20,+20] 0.1% 0.0% 0.1% 0.2% 0.5% 0.2% -0.2%

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Study Focus Data Research Period

Event

DeLong (2001a)

U.S. Daily stock prices of 56 domestic bank mergers 1991-1995 Event study; market and risk adjusted model and regression analysis using OLS

[-10,+1] [-10,+1] -2.2%*** Bank mergers destroy shareholder value of acquiring banks. Geographic and product diversification are determining factors and have a negative impact. Method of payment is not a significant factor.

DeLong (2001b)

U.S. Daily stock prices of 280 domestic bank mergers 1988-1995 Event study; market and risk adjusted model and regression analysis using OLS

[-10,+1] [-10,+1] -1.7%*** Bank mergers increase shareholder value of target banks, decrease shareholder value of acquiring banks and have no significant impact on shareholder value of the combined entities. Geographic and product diversification, relative size of the target to acquirer and pre-merger performance of the target are determining factors. Payment method, government assistance, hostility of the takeover and multiple acquirers are not significant factors.

Houston, James and Ryngaert (2001)

U.S. Daily stock prices of 64 large bank mergers 1985-1996 Event study; market adjusted model and regression analysis using OLS

[-4,+1] a [-4,+1] -3.5%*** Bank mergers increase shareholder value of target banks and combined entities, and decrease shareholder value of acquiring banks. More recent mergers appear to result in more positive revaluations of the combined entities.

Anderson, Becher and Campbell II (2003)

U.S. Daily stock prices of 97 billion-dollar bank mergers 1990-1997 Event study; market and risk adjusted model

[-5,+1] [-5, +1] -1.1%** Bank mergers increase shareholder value of target banks and combined entities, and decrease shareholder value of acquiring banks. CEO compensation is positively related to anticipated merger gains around the announcement date.

Cornett, Hovakimian, Palia and Tehranian (2003)

U.S. Daily stock prices of 423 bank acquisitions 1988-1995 Event study, market and risk adjusted model and regression analysis using OLS [-1,+1] [-1] [0] [+1] [-1,0] [-1,+1] -0.5%*** -0.2%* 0.0% -0.7%** -0.7%**

Bank mergers destroy shareholder value of acquiring banks. Geographic or product diversifying bank acquisitions earn significantly negative abnormal returns for acquiring banks whereas focusing acquisitions earn zero abnormal returns. Payment method is a determining factor and corporate governance variables are less effective in diversifying deals.

DeLong (2003) U.S. and non-U.S. Daily stock prices of 397 U.S. and 41 non-U.S. bank mergers

1988-1999

Event study, market and risk adjusted model and regression analysis using OLS [-10,+1] [-10,+1] All U.S. Non-U.S. -1.9%*** -2.1%*** 0.2%

Non-U.S. domestic bank mergers enhance the value of combined partners, acquirers do not lose, and targets increase their values. Acquirers in U.S. domestic bank mergers earn more and non-U.S. targets earn less than their non-U.S. counterparts. Acquirers and targets earn similar returns in mergers announced in countries with relatively well-developed stock markets.

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Event

Scholtens and de Wit (2004) U.S. and Europe Daily stock prices of 61 U.S. and 20 European bank mergers 1990-2000 Event study, market and risk adjusted model [-3,+31] [-3,+31] b Europe U.S. 2.4% -1.1%

Overall, bank mergers result in small positive abnormal returns and that target banks realize significantly higher returns than acquirers. In Europe, the differences between acquirer and target returns are more modest than in the U.S.

Beitel, Schiereck and Wahrenburg (2004)

Europe Daily stock prices of 98 large bank acquisitions in 17 countries 1985-2000 Event study, market and risk adjusted model and regression analysis using OLS [-20,+20] [0] [-1,0] [-1,+1] [-10,+10] [-20,+20] -0.1% 0.1% 0.0% 0.2% -0.2%

Bank mergers increase shareholder value of target banks and combined entities, and have no significant impact on shareholder value of acquiring banks. Product/activity focus of the target, relative return on equity and the target’s market-to-book ratio are determining factors.

Campa and Hernando (2006)

Europe Daily stock prices of 172 bank mergers and acquisitions in 15 countries 1998-2002 Event study, market and risk adjusted model and regression analysis using OLS [-30,+30] [-1,+1] [-30,+1] [-1,+30] [-30,+30] -0.9%** -1.8%** -1.2% -2.4%**

Bank mergers increase shareholder value of target banks around the announcement and have no significant impact on shareholder value of acquiring banks. One year after the announcement, excess returns were not significantly different from zero for both targets and acquirers. The differences in shareholder returns for the acquiring firms between national and cross-border deals and small and large deals are not significant.

Schmautzer (2006) Inter-national Daily stock prices of 96 cross-border bank mergers in 41 countries 1985-2005 Event study, market and risk adjusted model and regression analysis using OLS [-20,+20] [-20,0] [-1,0] [0] [-1,+1] [-5,+5] [-10,+10] [-20,+20] -0.5% -0.7%** -0.7%*** -1.1%*** -1.1%* -1.0% -0.7%

Bank mergers increase shareholder value of target banks and combined entities, and decrease shareholder value of acquiring banks. Lack of stand-alone growth prospects of the target, cost efficiency of the target, time of the deal and several country specific variables are determining factors.

DeLong and DeYoung (2007)

U.S. Daily stock prices of 216 large mergers and acquisitions 1987-1999 Event study, market and risk adjusted model and regression analysis using OLS [-10,+10] [-10,+1] [-10,+5] [-5,+5] [-10,+10] -2.4%*** -3.2%*** -3.2%*** -3.1%***

Bank mergers increase shareholder value of target banks, decrease shareholder value of acquiring banks and have no significant impact on shareholder value of the combined entities. Banks and investors learn by observing information that spills over from previous bank mergers.

Lensink and Maslennikova (2007)

Europe Daily stock prices of 75 bank mergers in 19 countries 1996-2004 Event study, market and risk adjusted model, regression analysis and FF 3 Factor model [-20,+20] [-1,+1] [-2,+2] [-5,+5] [-10,+10] [-20,+20] 0.4% 0.2% 0.4%** 0.3%** 0.2%***

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Event

Valkanov and Kleimeier (2007) U.S. and Europe Daily stock prices of 105 bank mergers, 84 U.S. and 21 European bank mergers 1997-2003 Event study, market and risk adjusted model [-1,+20] All [0] All [-1,+1] U.S. [0] U.S. [-1,+1] Eur [0] Eur [-1,+1] -0.5%*** -1.0%*** -0.8%*** -1.5%*** 0.8%** 1.0%**

For the total sample and the U.S. sub sample, bank mergers increase shareholder value of target banks and decrease shareholder value of acquiring banks. For the European sub sample, bank mergers increase shareholder value of both acquiring and target banks.

This study (2008) Europe, Asia, and U.S. Daily stock prices of 310 bank mergers: 181 in Europe, 55 in Asia and 74 in the U.S. 1998-2007 Event study, market and risk adjusted model, Corrado rank test and regression analysis [-20,+20] All [0] c All [-1,+1] Eur [0] Eur [-1,+1] Asia [0] Asia [-1,1] U.S. [0] U.S. [-1,+1] 0.3%*** 0.6%*** 0.2%** 0.3% 0.3% 1.6%*** 0.6%*** 0.8%**

Bank mergers increase shareholder value of acquiring banks. This occurs for the total sample and for three geographic sub samples: Europe, Asia and the U.S. Factors that appear to have a significant impact on shareholder value are geographic market diversification, the financing method, the size of the acquirer, the relative deal size and the acquirer’s risk factor. Product market diversification, the payment method, the listing effect and the firm size of the acquirer may be driving factors. The time effect, pre-performance and the market-to-book ratio of the acquirer are insignificant factors.

a

4 days prior to the leakage date to 1 day after the announcement date

b

Abnormal returns measured against a bank sector index. Study also documents abnormal returns measured against a general market index

c

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2.5 Hypothesis development

The first part of this paper will examine the effect of bank acquisition announcements on the shareholder value of acquiring banks. Theories regarding bank mergers and acquisitions assume that the majority of the transactions are motivated by the wish to realize efficiency improvements, financial synergies, increased market power and/or heightened diversification. These are all factors likely to enhance shareholder value for the acquiring bank. The general findings in empirical research, however, tend to find negative shareholder returns for acquiring banks, especially the findings of studies focusing on the U.S. This raises the question why bank consolidation has been and continues to be so prevalent when gains are not observable on average and why the theories differ from the empirical research?

The most straightforward answer states that the nature of the data does not represent the true economic impact of mergers and acquisitions. In abnormal return studies, the time period under consideration is typically short, and the exact interval is uncertain. Banks often engage in discussions prior to the announcement and investors speculate on potential target candidates. Another critical issue may arise as researchers try to obtain a clean data set, thereby excluding relevant data points. The results may be biased as banks are excluded, because active participants may achieve substantial gains. Although these problems should not be unnoticed, they will probably not explain the inconsistency of the empirical evidence with the large number of bank mergers and acquisitions. A second answer relates to the motives of bank acquisitions and centers on two allegations concerning managerial behavior. First, managers may have an unrealistic view of their skills. This may lead to the believe that they are capable of capturing gains from an acquisition, while in fact they are not more capable to do so than others. This phenomenon is described as managerial hubris. In the banking industry, where mergers and acquisitions are not rare, this argument does not seem valid. Moreover, it remains unclear why managerial hubris should be any greater in the merger and acquisition area than in other parts of banking activities. Second, agency problems may play an important role in explaining the inconsistency. According to this theory, bank acquisitions may be in the best interest for managers but not for the acquiring bank’s shareholders. Manager’s power, prestige and remuneration will increase at the expense of shareholders, who generally overpay for such acquisitions and suffer dilution in firm value. The fact that managers of the target bank seem more than capable of obtaining golden parachutes and lucrative buyout agreements raises another question. Maybe value gains from bank acquisitions are reality, but the payments to the two groups of managers neutralizes these gains. This would be consistent with the data and the theory of an agency problem.

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(2000), Scholtens and de Wit (2004), and Campa and Hernando (2006) measured abnormal returns against two different benchmark indices, thereby improving robustness. This paper will measure abnormal returns using general market indices and country-specific bank sector indices. Third, this study will improve heteroscedasticity robustness of tests on daily stock data through the use of the GARCH estimation method as an alternative to OLS/WLS techniques. Based on the theories and the studies discussed previously, there are no explicit expectations whether bank acquisitions create or destroy value for the acquiring banks in the total sample. The first hypothesis addresses this issue and will represent the core of the analysis in this paper.

Hypothesis 1 (The Value Effect Hypothesis)

H0: there are no significant average abnormal returns for the acquiring banks in the event window as

a result of a bank acquisition announcement

Ha: there are significant average abnormal returns for the acquiring banks in the event window as a

result of a bank acquisition announcement

The second part of this paper will examine the impact of several deal and bank specific factors that may determine the announcement effect on acquiring banks. Several theories have been discussed regarding potential drivers of merger and acquisition success. Furthermore, many studies have empirically tested the significance of these potential drivers by conducting mean statistics analyses and/or cross sectional regression analyses. In line with these studies, the second hypothesis relates to several of these deal and bank specific factors. To control for these variables, sub samples will be created for a mean statistics analysis. Next, a cross-sectional regression analysis will be conducted, in which all independent variables are considered that may have a significant impact on value creation. The role of geographic and product market diversification, the method of payment, the time effect, the listing effect and the financing method will be analyzed using binary dummy variables. The role of the acquiring bank’s size, relative deal size, the pre-merger performance of the acquiring bank and the market-to-book value of the acquiring bank will be analyzed using continuous regression variables.

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Hypothesis 2 (Determinants of Value Hypothesis)

In order to identify factors that have a significant impact on shareholder value effects for acquiring banks, sub samples and a cross-sectional regression analysis will be used on factors capturing:

(i) Geographic market diversification (target bank is located in the same country or not) (ii) Product market diversification (acquirer and target same NACE classification or not) (iii) Payment method (the transaction is paid with solely cash or otherwise)

(iv) Time (the transaction is between 1998 and 2004 or between 2003 and 2007) (v) Listing (the target bank is listed at a stock exchange or not)

(vi) Financing method (the transaction is financed with a capital increase or not)

(vii) Firm size (the acquiring bank has a market capital in excess of EUR 5 billion or not) (viii) Relative deal size (the deal size is more than 5% of the acquirer’s market capital or not) (ix) Pre-performance (the acquirer’s return over the prior 6 months higher than 10% or not) (x) Market-to-book ratio (the acquirer’s market-to-book ratio is higher than 2 or not)

The Announcement Effect of Bank Acquisitions on the Shareholder Value of Acquiring Banks