Stock Price Reactions of an M&a Announcment

Diversification versus Specialization : An Event Study of M&As in the European Banking Industrya

Laetitia LEPETITa,b , Stéphanie PATRYb* & Philippe ROUSb

a b

Department of Economics, University of Birmingham, Edgbaston, B15 2T, UK Centre de Recherche en Macroéconomie Monétaire, University of Limoges, France.

Preliminary Version February 2002

Abstract This study examines the stock market reaction in terms of expected return and risk to bank M&As that have been announced from 1991 to 2001 in 13 European countries. M&As were divided into several groups depending upon activity and geographic focus and diversification. A Bivariate GARCH model is used to estimate abnormal return taking betas volatility into account. Our results show that there is, on average, a positive and significant increase in value for target banks. Moreover, we find that on average there is a positive and significant market reaction for the two following type of transactions: cross-product diversification and focusing geographic. We further investigated the impact of M&As events in terms of systematic risk. Our results reveal that the market expects an increase in the risk exposure for the «bancassurance». This result is consistent with the choice of European banking supervisory agencies to reinforce the supervision of European financial conglomerates. JEL classification : G14 ; G21; G34. Keywords: European banks mergers and acquisitions, Universal banking, Bivariate GARCH, Abnormal return, beta-market risk.

* Corresponding author. Tel: +33 (0) 555 43 57 51; Fax: +33 (0) 555 43 56 95; E-mail address: stephanie.patry@drec.unilim.fr. a We would like to thank Andy Mullineux (University of Birmingham) and Amine Tarazi (University of Limoges) for their helpful comments.

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1. Introduction

Over the last two decades, the European banking industry has experienced an unprecedented level of consolidation as mergers and acquisitions (M&As) among financial institutions have taken place...