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Journal of Financial Services Research

Published in:

19-06-2019

Banking Crises and Market Timing: Evidence from M&As in the Banking Sector

Authors: Chung-Hua Shen, Yehning Chen, Hsing-Hua Hsu, Chih-Yung Lin

Published in: Journal of Financial Services Research | Issue 3/2020

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Abstract

We investigate whether the gains are greater for banks that conduct mergers and acquisitions (M&As) during banking crises than during non-crisis periods. We contribute to the literature by examining 1984 M&As using global banking sample from 106 countries (areas) during 1994 ~ 2009. We find the synergistic gains of acquiring banks during banking crises are larger than those during non-crisis periods. We further find that such gains are greater when acquiring weak targets, for acquirers in developed countries, and for acquirers in domestic M&As. This study confirms that a banking crisis is an appropriate time for banks to conduct M&As.

previous article Quantifying and Stress Testing Operational Risk with Peer Banks’ Data

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Notably, all three interpretations can explain why acquiring a weak target bank might be profitable for banks. Lacking the global data of fire-sale price and government support, we thus cannot clarify which one is better explanation of the synergistic gains.

This is because non-listed banks represent a majority of the banks (around 89%) in our sample. Köhler (2015) also includes a large number of unlisted banks in his sample. According to Köhler (2015), their inclusion not only gives a more representative picture of the EU banking sector but also increases the number of bank types and business models that can be analyzed. Further, we focus on depository banks, such as savings, cooperative, and commercial banks, because their businesses are more consistent across countries than other types of banks, which thereby reduces heteroskedasticity.

Our definition of small banks may be subjective, but a robustness check is used to reduce that subjectivity. Our results are robust to including all the small-bank acquisitions. The results are not reported for brevity and are available on request.

La Porta et al. (1998) report that developed countries tend to have good governance. Knyazeva et al. (2013) and Kanagaretnam et al. (2014) find that the effects of institutional factors on the quality of banks’ earnings vary in different income countries. The institutional factors are represented by the rule of law and the efficiency of the judicial system of a country. Knyazeva et al. (2013) use the protection of property rights, rule of law, control of corruption, political stability, and legal origin to analyze the institutional effect on a firm’s performance and efficiency.

Similar studies regarding bank performance in developed and developing countries examine the penetration from the former to the latter. For example, using data from 29 member countries of the Organization for Economic Co-operation and Development, Focarelli and Pozzolo (2001) find that banks with cross-border shareholdings are on average larger, more profitable, and usually based in more highly developed banking markets. Jeon et al. (2011) focus on Asia and Latin America from 1997 to 2008 to show that the positive penetration by foreign bank and banking competition links are associated with a spillover effect from foreign banks to their domestic counterparts.

Caprio and Klingebiel (2003) may have been the first study to classify banking crises into systemic (defined as much or all of bank capital being exhausted) and non-systemic (borderline and smaller) banking crises. However, determining when a crisis is over is not always clear.

The matching method is widely used to mitigate the selection bias problem. Rosenbaum and Rubin (1983, 1985) first proposed propensity score matching to reduce the multidimensional matching problem to a one-dimensional matching problem.

Although the statistical difference in terms of ASSET is significant, their economic difference is small and is 0.159.

In addition, we also estimated the ACARs around M&A announcement dates. The results show that there is no significant effect around announcement dates, which is consistent with the finding of Beltratti and Paladino (2013). Furthermore, as mentioned by Beltratti and Paladino (2013), “a combination of opacity of bank balance sheets and substantial overall uncertainty may have caused investors to be more cautious in reacting to the announcement of a potential deal, potentially postponing repricing of stocks to completion of the process,” which may be a reason why the CARs are statistically insignificant on announcement dates.

See also Focarelli and Pozzolo (2001), Amihud et al. (2002), Buch and DeLong (2004), Beccalli and Frantz (2009), and Lim et al. (2016).

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Title: Banking Crises and Market Timing: Evidence from M&As in the Banking Sector
Authors: Chung-Hua Shen
Yehning Chen
Hsing-Hua Hsu
Chih-Yung Lin
Publication date: 19-06-2019
Publisher: Springer US
Published in: Journal of Financial Services Research / Issue 3/2020
Print ISSN: 0920-8550
Electronic ISSN: 1573-0735
DOI: https://doi.org/10.1007/s10693-019-00318-4