Valuation and spillover effects of large bank mergers: Evidence from Japan

Mergers and acquisitions (M&A) among major banks could change interbank lending dynamics and overall competitive strategies, but the market valuation and spillover effects of these activities remain poorly understood. This study focuses on two M&A events in Japan to examine market reactions: the 2005 creation of Mitsubishi UFJ Financial Group, which followed the Japanese “Big Bang” financial reforms, and the 2011 merger involving Sumitomo Mitsui Trust Group, which occurred after the global financial crisis (GFC). We propose a multi-method framework that combines three streams of analytics methods to evaluate the M&A events. The first stream estimates cumulative abnormal returns (CAR) using alternative expected return specifications commonly employed in event studies: the market model (MM), the capital asset pricing model (CAPM), and the Fama–French three-factor model to generate normal returns and ensure robustness across model assumptions; the second stream uses vector autoregression (VAR) models in the Granger causality test and calculates impulse response functions (IRFs) for spillover effects between the treatment and control group; the third stream implements the propensity score matching (PSM) model for the causal estimate of the average treatment effect on the treated (ATT). Our analysis found that bank M&A differs from M&A in other sectors: the closing date of bank mergers receives a significant positive market reaction, whereas the announcement date shows an insignificant reaction. The findings provide a unique understanding of the Japanese banking sector and offer insights to investors, managers, and regulators regarding market efficiency and systemic stability.