Further analysis of mergers and shareholder wealth effects in European banking

Abstract

Although bank mergers have been a topic of ongoing research in the USA, particularly in view of reforms instituted by the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, the evidence on shareholder wealth effects in European bank mergers is thin. A key question is whether the changes in the banking industry are applicable worldwide or reflect segmentation at the regional level. In this paper results are provided from a larger and more recent sample than previous studies. In contrast to previous findings, findings here are more consistent with those of US bank mergers, leading to the conclusion that there is less geographical heterogeneity in the industry than previous studies indicated. In particular, low target abnormal returns are found, which, it is believed, stem from the fact that acquirers are not willing to pay high premiums in a competitive environment in which profitability levels are eroding. It was found that abnormal returns are higher in bank-to-bank rather than cross-product deals, suggesting that there is still scope for exploiting economies of scale and market power within the banking sector. The evidence in relation to cross-border deals compared to national deals is mixed, giving some weak evidence in favour of the view that there are gains to geographical diversification.