Wealth Creation in the Largest Banking Mergers- An Empirical Analysis

This research paper based on a sample of largest banking mergers analyzes the impact of merger announcement on the wealth of bidding and target firms. The study also examines the concept of market efficiency in the context of M&A activity. We test the efficient capital market hypothesis which states that share prices react instantaneously when new information arrives in the market. The sample acquirer and target firms were selected on the basis of the value of the deal. The study was based on 32 acquirer and 9 target banks. The methodology was based on CAR analysis with market model method. The acquirer banks had statistically significant superior profitability indicators in comparison to the target banks. The study finds that acquisition/merger announcement creates value for the target banks while the returns of the bidding banks gets eroded. The CAR was positive for target banks with statistical significance at all levels in different time window period of analysis. Acquirer banks had negative announcement returns. The CAR for acquirer banks was negative for all the time window period. The negative CAR for the acquirer banks was statistically significant for the longer time window periods. The results may indicate that the merger terms were unduly favorable to the target banks in comparison to the acquirer banks. Investors are skeptical about the future benefits from the deal for the acquirer banks. The study documents the erosion of wealth for the acquirer firms on account of M&A announcement.