Investigation on Diversification, Monitoring Effects, and Banking Mergers

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Investigation on Diversification, Monitoring Effects, and Banking Mergers

April 15, 2021 Economics and Management 0

This study looks at the wealth impact of diversification on banking mergers and acquisitions in the United States. The abnormal returns of each party around the merger announcements are examined after 2,148 domestic US banking M&As announced between 1985 and 2006 are listed based on geographic and operation diversification. The abnormal return is equivalent to the daily real return minus the market model’s predicted return. Geographic and operation diversification, I’ve discovered, appears to reduce the value of bidding firms, as shown by the bidders’ negative abnormal returns around the merger announcement, but increases the value of target firms. Banks that are being targeted are divided into private and public corporations. Bidders acquiring private targets have substantially higher cumulative abnormal returns (CARs) than bidders acquiring public targets in stock transactions. CARs measure periodic output and are measured during various event windows encompassed by event days (-n, +n). It supports the private company monitoring theory, which is common in businesses with concentrated ownership. To ensure the business’s stable growth and proper positioning, decision-makers can carefully match it and time it. In such a risky industry, regulators should closely track information disclosure, ensure deal transparency, and provide guidance to all parties, especially in the case of diversification.

Author (s) Details

Wenjia Zhang
School of International Economics, China Foreign Affairs University, China.

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