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Comparing bank mergers in Europe and the USA: bidding bank performance

By Jens Hagendorff

Abstract

Banking is different from the provision of other goods and services and of pivotal importance to economic growth and financial development. Against the background of continuing merger activity in the US and European banking sectors, this thesis (i) compares the performance implications of bank mergers and acquisitions (M&A) for bidding banks in both geographic regions and (ii) seeks to explain reported differences. Research on European bank M&A has received relatively little academic interest in the extant\ud literature. To date, conclusions about the performance implications of acquisition activities are almost exclusively derived from a US market context. However, the case for investigating the performance effects of M&A outside the US seems compelling given significant structural, legal and regulatory differences between the US and many European banking sectors.\ud \ud \ud The results reported in this thesis show marked differences for both market valuation effects and post-merger financial performance between bank mergers in Europe and the US. On the whole, the performance outcomes for European bidding banks appear to be more positive compared with those of US institutions. Thus, European bidding banks realise positive abnormal returns over the announcement period and small\ud increases in post-merger performance in the years following a merger. It is particularly interesting that performance improvements for European banks are most pronounced for cross-border and product diversifying M&A-two types of M&A about whose performance effects the US-based literature is most sceptical. By contrast, shareholders in US bidding banks experience wealth losses and there are no gains in post-merger accounting performance.\ud \ud \ud The thesis also reports findings regarding the dominant motivation behind M&A in Europe and the US. It appears that European banks pursue a cost-cutting strategy when they increase cost efficiency levels and decrease post-merger lending vis-a-vis non-merging banks following a deal. US banks, on the other hand, expand both on- and off-balance sheet activities in the post-merger period, but simultaneously appear to suffer from deteriorating post-merger efficiency levels.\ud \ud \ud Finally, novel findings that link laws and regulations (prevalent in the country of the bidder and the target) to merger performance are presented. As regards laws applicable\ud to targets, the results reported in this thesis are consistent with the view that the level of investor protection enjoyed by target bank shareholders partly explains why mergers attract different market reactions across countries. Evidence is proffered that shows an inverse relationship between the level of investor protection prevalent in the target country and abnormal returns that bidders realise during the announcement period.\ud Accordingly, bidding banks realise higher returns when targeting low protection economies (most European economies) than bidders targeting institutions which operate\ud under a high investor protection regime (the US). The explanation put forward for this is that bidding bank shareholders need to be compensated for an increased risk of\ud expropriation by insiders which they face in a low protection environment where takeover markets are illiquid and there are high private benefits of control. As regards regulation in the country of the bidder, this thesis examines whether the stringency of bank regulation has an impact on the effectiveness of corporate governance at bidding banks. The bidder's governance effectiveness is measured as the extent to which board characteristics\ud improve bank merger outcomes in Europe and the US. Essentially, this allows the following question to be examined: Is regulation a substitute or a complement to\ud governance? If regulation and governance are substitutes, one may expect that, to the extent that monitoring by shareholders restricts managerial discretion and its potentially negative effects on shareholder wealth, stricter regulation is associated with less effective\ud governance. However, the results reported in this thesis suggest that board characteristics such as independence, diversity and board leadership structure play a role in improving bank M&A in the US, but not in Europe. Given that the US, by most standards, exhibits the stricter regulatory regime, the results point to a complementary role between\ud bank regulation and governance.\u

Publisher: Leeds University Business School
Year: 2008
OAI identifier: oai:etheses.whiterose.ac.uk:779

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