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Title: Governance and Merger Activity in Banking

Citation Type: Journal Article

Publication Year: 2012

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Abstract: One method of evaluating the success of management decisions regarding acquisitions is to examine equity price movements as the news of the merger is made public. The price movement of the acquiring firm’s equity around the announcement of the acquisition indicates if shareholders believe management has acted in their interest. In the banking industry, researchers have found that, on average, equity values of the acquiring bank do not display abnormal positive returns upon announcement, and often display statistically significant negative returns. Another line of research has documented that CEOs are better compensated for managing larger organizations, particularly when involved in merger activity. This study investigated the possibility of a linkage between weak firm-level corporate governance structures at banks and their propensity to make acquisitions that produce negative reactions from equity holders. A commercially sold governance index from Institutional Shareholder Services, now part of MSCI Barra, was used to measure governance strength. Acquisition events were from the comprehensive Thomson Reuters SDC merger database and equity values from CRSP. Results indicated that weaker corporate governance is associated with inferior stock market reactions upon announcement of an acquisition, which should be of interest to regulators as they monitor corporate actions for covert motives, and to investors in their investment selection process.

Url: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1909271

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Authors: Piskula, Thomas, J

Periodical (Full): Journal of Business & Economic Studies

Issue: 1

Volume: 17

Pages: 1-15

Data Collections: IPUMS USA

Topics: Other

Countries: United States