The short-term market reaction to U.S. bank M&As

Abstract

This study examines the short-term shareholder wealth effects to U.S. bank mergers and acquisitions (M&As) that were announced and completed between 1989 and 2004. Using various event windows, the cumulative abnormal returns (CARs) to target firms are positive, bidder firm abnormal returns are negative, and the combined CARs are positive. This result is consistent with the synergy and hubris hypothesis wherein bank M&As are wealth-creating events as synergies exist; however, bidders may overpay to realize these gains. The M&As are examined by the method with which they are financed, namely, cash, or a combination of cash, stock, and/or debt, versus stock only. The target, bidder and combined mean CARs for M&As that are financed by a cash or combination payment are higher than those that are financed by stock for the full sample period and the 1999 – 2003 sub-sample period. Furthermore, the results indicate a positive and statistically significant relationship between the bidder and combined CARs and cash or combination payments. Further evidence presented suggests a positive and statistically significant relationship between the target CARs and whether the M&A is geographically focusing (intrastate), with no corresponding relationship existing for the bidder and combined firms. Results, however, do indicate that the mean combined CARs are higher for intrastate compared to interstate M&As. In addition, the target, bidder and combined CARs are driven in part by the relative size of the merger parties.