Mergers and acquisitions in the European financial indusrty : a two-dimensional approach

Abstract

The aim of this research is to study the value generated to shareholders by the announcement of mergers and acquisitions in the European financial industry over the period 2000-2006. It examines these effects under a two-dimensional approach. The first part focuses both on acquiring and target firms but not only in the banking sector. In contrast with the majority of previous papers, it scrutinizes the whole industry: banks, asset management, brokerage and insurance firms. Purpose here is to study the reaction of the market between numerous types of M&A announcements and to point out the differences, if any, that may arise due to dissimilar characteristics of a merger announcement. Furthermore, it explains why the abnormal returns of target, acquirer and the combined entity vary across M&A announcements, focusing on firm-specific characteristics. The second part concentrates on intra-industry reaction of rival firms which are located at the same country as the target institution when a merger or acquisition occurs. Objective here is to determine whether the information signal from M&A announcements in European financial industry is relevant only to the valuation of the firms engaged in the transaction, or it is transmitted to other, rival with the target, firms. Since M&A announcements can signal prospects for the industry, rivals’ values can respond to this announcement given that their value is partially dependent with the trend and the prospects of the industry. In view of the fact that intra-industry effects also vary across announcements, it performs cross sectional analysis based on event-specific and rival firm-specific factors to explain this variation.