Diversification, Monitoring Effects and Banking Mergers

Wenjia Zhang


This study investigates the wealth effects of diversification on United States banking mergers and acquisitions announcement. 2,148 domestic U.S. banking M&As announced between 1985 and 2006 are classified into groups based on geographic and activity diversification, and abnormal returns of each group around the merger announcements are examined. The abnormal return equals the daily real return minus the expected return which is calculated with the market model. I find geographic and activity diversification tends to decrease bidding firms’ value, reflected by the bidder’s negative abnormal returns around the merger announcement, but increase target firms’ value. Target banks are also grouped into private and public companies. In deals consummated with stock, bidders acquiring private targets experience significantly higher cumulative abnormal returns (CARs), showing the periodic performance and calculated during different event windows encompassed by event days (-n, +n), than bidders acquiring public targets do, confirming with the monitoring hypothesis of private companies usually with concentrated ownership.


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DOI: https://doi.org/10.5539/ijef.v6n2p133

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International Journal of Economics and Finance  ISSN  1916-971X (Print) ISSN  1916-9728 (Online)  Email: ijef@ccsenet.org

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