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Bank acquisitions of security firms: the early evidence

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  • Aigbe Akhigbe
  • Jeff Madura

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.

Suggested Citation

  • Aigbe Akhigbe & Jeff Madura, 2004. "Bank acquisitions of security firms: the early evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 14(7), pages 485-496.
  • Handle: RePEc:taf:apfiec:v:14:y:2004:i:7:p:485-496 DOI: 10.1080/0960310042000216042
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    References listed on IDEAS

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    1. 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.
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    Cited by:

    1. Christian Weller, 2009. "Credit Access, the Costs of Credit and Credit Market Discrimination," The Review of Black Political Economy, Springer;National Economic Association, pages 7-28.
    2. Christian Weller, 2010. "Have Differences in Credit Access Diminished in an Era of Financial Market Deregulation?," Review of Social Economy, Taylor & Francis Journals, pages 1-34.
    3. J. Kimball Dietrich, 2012. "Bank Acquisitions and Strategy since the GLB Act," Chapters,in: Research Handbook on International Banking and Governance, chapter 23 Edward Elgar Publishing.
    4. Demirbag, Mehmet & McGuinness, Martina & Akin, Ahmet & Bayyurt, Nizamettin & Basti, Eyup, 2016. "The professional service firm (PSF) in a globalised economy: A study of the efficiency of securities firms in an emerging market," International Business Review, Elsevier, vol. 25(5), pages 1089-1102.

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