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Do announcements of bank acquisitions in emerging markets create value?

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  • Farouk Soussa
  • Tracy Wheeler
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    Abstract

    The latter half of the 1990s saw a sharp rise in entry of banks from developed countries into emerging market financial systems. This was motivated by, among other things, the belief that expansion into underdeveloped financial markets would result in diversification and efficiency gains, and thus prove to be value creating. This paper uses a standard event-study methodology to determine the reaction of the acquirer’s stock price to announcements of acquisitions in emerging financial markets (EFMs). Under the assumption of efficient markets, a positive reaction is interpreted as supporting the hypothesis that expansion into EFMs is value creating. However, in line with the literature on cross-border banking acquisitions in developed countries, announcements are found to be associated with negative abnormal returns for the acquirer, suggesting that potential downsides, such as operational risk, legal and social barriers, and political risk, are judged by markets to outweigh the potential benefits. Moreover, the value destruction from an acquisition was found to be bigger in all regions in the 18 months following the Asian crisis.

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    Bibliographic Info

    Paper provided by Bank of England in its series Bank of England working papers with number 315.

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    Date of creation: Dec 2006
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    Handle: RePEc:boe:boeewp:315

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    1. Focarelli, Dario & Pozzolo, Alberto Franco, 2003. "Where Do Banks Expand Abroad? An Empirical Analysis," Economics & Statistics Discussion Papers esdp03009, University of Molise, Dept. EGSeI.
    2. Adrian E. Tschoegl, 2004. "Financial Crises and the Presence of Foreign Banks," International Finance 0405016, EconWPA.
    3. Yamori, Nobuyoshi, 1998. "A note on the location choice of multinational banks: The case of Japanese financial institutions," Journal of Banking & Finance, Elsevier, vol. 22(1), pages 109-120, January.
    4. Vennet, Rudi Vander, 1996. "The effect of mergers and acquisitions on the efficiency and profitability of EC credit institutions," Journal of Banking & Finance, Elsevier, vol. 20(9), pages 1531-1558, November.
    5. Rossi, Stefano & Volpin, Paolo, 2003. "Cross-Country Determinants of Mergers and Acquisitions," CEPR Discussion Papers 3889, C.E.P.R. Discussion Papers.
    6. Mauro F. Guillén & Adrian E. Tschoegl, 1999. "At Last the Internationalization of Retail Banking? The Case of the Spanish Banks in Latin America," Center for Financial Institutions Working Papers 99-41, Wharton School Center for Financial Institutions, University of Pennsylvania.
    7. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
    8. Claessens, Stijn & Demirguc-Kunt, Asli & Huizinga, Harry, 1998. "How does foreign entry affect the domestic banking market?," Policy Research Working Paper Series 1918, The World Bank.
    9. Altunbas, Yener & Molyneux, Philip & Thornton, John, 1997. "Big-Bank Mergers in Europe: An Analysis of the Cost Implications," Economica, London School of Economics and Political Science, vol. 64(254), pages 317-29, May.
    10. Allen N. Berger & Robert DeYoung & Hesna Genay & Gregory F. Udell, 2000. "Globalization of financial institutions: evidence from cross-border banking performance," Finance and Economics Discussion Series 2000-04, Board of Governors of the Federal Reserve System (U.S.).
    11. Claudia M. Buch, 1999. "Why Do Banks Go Abroad? � Evidence from German Data," Kiel Working Papers 948, Kiel Institute for the World Economy.
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