Do CRA-related Events Affect Shareholder Wealth? The Case of Bank Mergers

This study examines the issue of whether CRA-related events impact the securityprices of banking institutions involved in mergers. While previous research hasestablished that bank shareholders experience a significant permanent loss of wealth uponthe announcement of a CRA protest, the current research finds no such evidence foreither CRA protests or the removal of CRA protests using a sample of banks involved inmergers between 1986 and 1998. We identify a key econometric issue associated withevent studies – the choice of a reference point for determining a bank’s baseline securityprice dynamics – as the driving factor in the divergence of the results. We argue that thechoice of a reference point should ideally cause the effects of other events that have anindependent influence on security price movements to be excluded from the analysis,which is the method employed in the current research. Supplemental analyses using across-sectional model of cumulative abnormal returns provide evidence that the marketresponds to CRA-related events, although the evidence does not generally support theview that such events have had large and significant negative impacts on bank stockprices.