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Bank acquisitions of security firms: the early evidence

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  • Aigbe Akhigbe
  • Jeff Madura
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    Abstract

    A bank acquisition affects the combination of financial services that are offered, and the potential synergy between services. Consequently, an acquisition can affect the performance and risk of the bank. While much research is focused on bank acquisitions and other financial institutions, there is very little research on the performance following bank acquisitions of securities firms. Until recently, banks were restricted from acquiring securities firms. Thus, related research could only speculate on the effects from integrating bank and securities services, or measure the initial market response to related regulatory changes. It is found that the announcement effects when banks acquire security firms are not significant. Similar results are found for a matched sample of bank acquisitions of other banks. Second, bank acquirers of security firms do not experience a reduction in risk, offering no support for the diversification hypothesis. These results also hold when applying a cross-sectional analysis that controls for other characteristics of the acquirers. Third, banks that acquire security firms experience weaker performance following the acquisitions than banks that acquire other banks. The results may be attributed to the high level of risk of securities firms as independent entities, the high price paid to acquire these firms, and the difficulty in merging bank and securities operations and cultures. These findings do not refute the notion of beneficial synergies between banks and security firms. However, they may suggest that the favourable revaluations of banks as a result of signals about impending consolidation were excessive. Consequently, the price paid by banks for security firm targets may have been excessive, allowing a wealth transfer to the security firm shareholders before the wave of acquisitions occurred. In addition, the market may have underestimated the complications and cost resulting from the integration of security activities with banking activities.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/0960310042000216042
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Applied Financial Economics.

    Volume (Year): 14 (2004)
    Issue (Month): 7 ()
    Pages: 485-496

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    Handle: RePEc:taf:apfiec:v:14:y:2004:i:7:p:485-496

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    Web page: http://www.tandfonline.com/RAFE20

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    1. John D. Lyon & Brad M. Barber & Chih-Ling Tsai, 1999. "Improved Methods for Tests of Long-Run Abnormal Stock Returns," Journal of Finance, American Finance Association, vol. 54(1), pages 165-201, 02.
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    5. Madura, Jeff & Wiant, Kenneth J., 1994. "Long-term valuation effects of bank acquisitions," Journal of Banking & Finance, Elsevier, vol. 18(6), pages 1135-1154, December.
    6. Mikkelson, Wayne H. & Partch, M. Megan, 1989. "Managers' voting rights and corporate control," Journal of Financial Economics, Elsevier, vol. 25(2), pages 263-290, December.
    7. Edward J. Kane & Haluk Unal, 1988. "Change in Market Assessments of Deposit-Institution Riskiness," NBER Working Papers 2530, National Bureau of Economic Research, Inc.
    8. Cornett, Marcia Millon & Tehranian, Hassan, 1992. "Changes in corporate performance associated with bank acquisitions," Journal of Financial Economics, Elsevier, vol. 31(2), pages 211-234, April.
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    10. Gallo, John G. & Apilado, Vincent P. & Kolari, James W., 1996. "Commercial bank mutual fund activities: Implications for bank risk and profitability," Journal of Banking & Finance, Elsevier, vol. 20(10), pages 1775-1791, December.
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    Cited by:
    1. Christian E. Weller, 2008. "Credit Access, the Costs of Credit and Credit Market Discrimination," Working Papers wp171, Political Economy Research Institute, University of Massachusetts at Amherst.
    2. Christian E. Weller, 2007. "Have Differences in Credit Access Diminished in an Era of Financial Market Deregulation?," Working Papers wp144, Political Economy Research Institute, University of Massachusetts at Amherst.

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