Friday, 26 March 2010: 17:45
ABSTRACT
Over the last two decades, the European banking sector has witnessed significant structural changes that resulted in its consolidation through a large number of mergers and acquisitions (M&As) and increased cross-shareholdings.This resulted in the dramatic drop in the number of credit institutions in the EU-15 from approximately 12,000 at the end of 1990 to just over 7,000 at the end of 2004, with the majority of M&As bring domestic deals.
The importance of the banking sector for economic growth becomes evident from the number and value of banks’ M&As to the total number of M&As and value of all sectors inEurope .
Taking into account the aforementioned developments, it is surprising that only a handful of studies have emerged to evaluate the stock market reaction to M&A announcements in the European banking sector.The present study attempts to shed additional light on the value creation of M&A deals in Europe by examining the stock price reaction of banks (acquirers and targets) to the announcement of M&A deals in the period 1990-2004 using a differentiated sample and modified methodology and hypotheses compared to previous research.
First, the data employed focuses exclusively on deals between banks where the acquirer is a bank registered in an EU-15 country and the target is either a bank located in EU-15 or in an emerging eastern European country. Second, in order to analyse whether a stock market facilitates the efficient dissemination of information, the study explores the value creation of the deals not only when banks involved in an M&A deal have shares listed on a stock market but also when a deal involves an unlisted bank.Third, besides the typical event study methodology, abnormal returns were also estimated using a GARCH framework in order to capture the possible effects from the heteroscedastic behaviour of share prices. In addition, a series of tests were employed to estimate the statistical significance of abnormal returns. Fourth, the present paper provides further evidence on the domestic versus cross-border deals controversy. Last, but not least, we analyse the determinants of abnormal returns, an issue overlooked in previous research.
The main findings of the study are as follows: First, it provides evidence of value creation in the European banking sector as the shareholders of the targets benefited from by positive and statistically significant abnormal returns while those of the acquirers earn small negative but statistically non-significant abnormal returns. Second, in the case of the shareholders of the acquirers, domestic M&As and especially those between banks with shares listed on the stock market, seem to be more beneficial compared to cross-border ones or those when the target is an unlisted bank. Third, shareholders of the targets earn in all cases positive abnormal returns. Fourth, although the link between abnormal returns and fundamental characteristics of the banks is rather weak, it appears that the acquisition of smaller, less efficient banks generating more diversified income are more value creating, while acquisition of less efficient, liquid and characterised by higher credit risk banks is not a value creating option.
Over the last two decades, the European banking sector has witnessed significant structural changes that resulted in its consolidation through a large number of mergers and acquisitions (M&As) and increased cross-shareholdings.This resulted in the dramatic drop in the number of credit institutions in the EU-15 from approximately 12,000 at the end of 1990 to just over 7,000 at the end of 2004, with the majority of M&As bring domestic deals.
The importance of the banking sector for economic growth becomes evident from the number and value of banks’ M&As to the total number of M&As and value of all sectors in
Taking into account the aforementioned developments, it is surprising that only a handful of studies have emerged to evaluate the stock market reaction to M&A announcements in the European banking sector.The present study attempts to shed additional light on the value creation of M&A deals in Europe by examining the stock price reaction of banks (acquirers and targets) to the announcement of M&A deals in the period 1990-2004 using a differentiated sample and modified methodology and hypotheses compared to previous research.
First, the data employed focuses exclusively on deals between banks where the acquirer is a bank registered in an EU-15 country and the target is either a bank located in EU-15 or in an emerging eastern European country. Second, in order to analyse whether a stock market facilitates the efficient dissemination of information, the study explores the value creation of the deals not only when banks involved in an M&A deal have shares listed on a stock market but also when a deal involves an unlisted bank.Third, besides the typical event study methodology, abnormal returns were also estimated using a GARCH framework in order to capture the possible effects from the heteroscedastic behaviour of share prices. In addition, a series of tests were employed to estimate the statistical significance of abnormal returns. Fourth, the present paper provides further evidence on the domestic versus cross-border deals controversy. Last, but not least, we analyse the determinants of abnormal returns, an issue overlooked in previous research.
The main findings of the study are as follows: First, it provides evidence of value creation in the European banking sector as the shareholders of the targets benefited from by positive and statistically significant abnormal returns while those of the acquirers earn small negative but statistically non-significant abnormal returns. Second, in the case of the shareholders of the acquirers, domestic M&As and especially those between banks with shares listed on the stock market, seem to be more beneficial compared to cross-border ones or those when the target is an unlisted bank. Third, shareholders of the targets earn in all cases positive abnormal returns. Fourth, although the link between abnormal returns and fundamental characteristics of the banks is rather weak, it appears that the acquisition of smaller, less efficient banks generating more diversified income are more value creating, while acquisition of less efficient, liquid and characterised by higher credit risk banks is not a value creating option.