Merger Means of Payment and Analyst's Forecast Bias Before Merger Announcement Date

ABSTRACT This study examines whether acquirer NOL-related tax benefits generated in an acquisition are shared with the target. For a sample of 1,959 acquisitions, we find that acquisitions of profitable targets by acquirers with NOLs are associated with higher acquisition premiums than acquisitions by non-NOL acquirers. This result indicates that potential post-acquisition tax benefits from use of acquirer NOLs are shared with the target in the form of higher transaction prices. We also find that the acquirer's merger announcement stock price response is positively associated with these tax benefits, which is consistent with the conclusion that acquirers retain part of these potential tax benefits.

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Financial institutions mergers: a strategy choice of wealth maximisation and economic value

Journal of Financial Economic Policy ◽

10.1108/jfep-06-2019-0113 ◽

2020 ◽

Vol 12 (4) ◽

pp. 495-529

Author(s):

Mohamad Hassan ◽

Evangelos Giouvris

Keyword(s):

Credit Risk ◽

Event Study ◽

Financial Institutions ◽

Value Creation ◽

Economic Value ◽

Abnormal Returns ◽

Study Analysis ◽

Event Window ◽

Content Type ◽

Merger Announcement

Purpose This study Investigates Shareholders' value adjustment in response to financial institutions (FIs) merger announcements in the immediate event window and in the extended event window. This study also investigates accounting measures performance, comparison of post-merger to pre-merger, including several cash flow measures and not just profitability measures, as the empirical literature review suggests. Finally, the authors examine FIs mergers orientations of diversification and focus create more value for shareholders (in the immediate announcement window and several months afterward) and/or generates better cash flows, profitability and less credit risk. Design/methodology/approach This study examines FIs merger effect on bidders’ shareholder’s value and on their observed performance. This examination deploys three techniques simultaneously: a) an event study analysis, to estimate and calculate abnormal returns (ARs) and cumulative abnormal returns (CARs) in the narrow windows of the merger announcement, b) buy and hold event study analysis, to estimate ARs in the wider window of the event, +50 to +230 days after the merger announcement and c) an observed performance analysis, of financial and capital efficiency measures before and after the merger announcement; return on equity, liquidity, cost to income ratio, capital to total assets ratio, net loans to total loans, credit risk, loans to deposits ratio, other expenses and total assets, economic value addition, weighted average cost of capital and return on invested capital. Deal criteria of value, mega-deals, strategic orientation (as in Ansoff (1980) growth strategies), acquiring bank size and payment method are set as individually as control variables. Findings Results show that FIs mergers destroy share value for the bidding firms pursuing a market penetration strategy. Market development and product development strategies enable shareholders’ value creation in short and long horizons. Diversification strategies do not influence bidding shareholders’ value. Local bank to bank mergers create shareholders’ value and enhance liquidity and economic value in the short run. Bank to bank cross border mergers create value for bidders’ in the long term but are associated with high costs and higher risks. Originality/value A significant advancement over the current literature is in assessing mergers, not only for bank bidders but also for the three pillars FIs of the financial sector; banks, real-estate companies and investment companies mergers. It is an improvement over current finance literature because it deploys two different strategies in the analysis. At a univariate level, shareholder value creation and market reaction to merger announcements are examined over short (−5 or +5 days) and long (+230 days) windows of the event. Followed by regressing, the resultant CARs and BHARs over financial performance variables at the multivariate level.

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