Master Thesis Sopov

St.
Petersburg University
Graduate School of Management
Master in Corporate Finance
THE ANNOUNCEMENT EFFECT OF U.S. BANK MERGERS:

AN EMPIRICAL ANALYSIS OF IMPACTING FACTORS
nd
Master’s Thesis by the 2 year student
Concentration — Corporate Finance
Dmitry Sopov
Research advisor:
Marat V. Smirnov,
Senior lecturer
St. Petersburg
2020
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ЗАЯВЛЕНИЕ О САМОСТОЯТЕЛЬНОМ ХАРАКТЕРЕ
ВЫПОЛНЕНИЯ ВЫПУСКНОЙ КВАЛИФИКАЦИОННОЙ
РАБОТЫ
2
АННОТАЦИЯ
Автор Сопов Дмитрий Эдуардович
Название ВКР Эффект от объявления о сделках слияния банков в США:
эмпирический анализ факторов влияния
Образовательна 38.04.02 Менеджмент
я программа
Направление Корпоративные финансы
подготовки
Год 2020
Научный Смирнов Марат Владимирович, к.э.н., старший преподаватеь
руководитель
Описание цели, Целью магистерской диссертации является выявление
задач и наличия и природы эффекта от объявления о сделках слияния банков
основных в США, а также определение факторов, оказывающих влияние на
результатов величину этого эффекта, с дальнейшим определением направления и
силы влияния этих факторов.
Основной задачей магистерской диссертации является ответ
на следующие вопросы:
 Есть ли значимая разница между абнормальной доходностью
банков-покупателей и банков-продавцов?
 Есть ли значимая разница между абнормальной доходностью
в период до объявления о сделки и абнормальной
доходностью после объявления о сделке?
 Когда эффект от объявления о сделке находит отражение в
ценах акций участвующих в сделке банков?
 Какие факторы, имеющие отношение к сделке, к
участвующим компаниям и к внешней среде, оказывают
значимое влияние на величину абнормальной доходности
банков-покупателей и банков-продавцов? Какой характер
носит такое влияние и насколько сильно это влияние?
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В ходе исследования было выявлено, что эффект от
объявления о сделке, действительно, присутствует на рынке слияний
и поглощений американских банков. Акции банков-покупателей в
среднем показывают негативную доходность после объявления о
сделке, а акции банков-продавцов показывают позитивную
доходность после объявления. Абнормальность доходность до и
после объявления о сделке не имеет значимых отличий у банков-
покупателей, а для банков-продавцов абнормальная доходность
после объявления о сделке значимо превосходит абнормальную
доходность до объявления. Эффект от объявления проявляется сразу
же после объявления о сделке, но не ранее. Хотя акции банков-
продавцов показывали положительную динамику абнормальной
доходности в каждый из трёх дней до объявления о сделках,
значения абнормальных доходностей не являются статистически
значимыми. Тем не менее, такая положительная динамика может
служить поводом для проведения регуляторами проверки
определённых сделок на предмет инсайдероской торговли.
С помощью регрессионного анализа были выявлено наличие
значимого влияния выбранных факторов на величину абнормальных
доходностей. Так, на величину абнормальных доходностей банков-
покупателей оказывают значимое влияние такие факторы, как
величина сделки, результативность банка-покупателя в период до
объявления о сделке, а также величина банка-продавца относительно
величины банка-покупателя. Отдельно стоит отметить, что первые
два из перечисленных факторов связаны с результирующей
переменной нелинейно.
Что касается абнормальных доходностей банков-продавцов,
то они подвержены значимому влиянию со стороны следующих
факторов: величина сделки, способ финансирования сделки,
результативность банка-продавца в период до объявления о сделке и
строгость законодательства. Отдельно стоит отметить, что величина
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сделки и абнормальные доходности связаны друг с другом
нелинейно.
Ключевые слова Слияния и поглощения, банки США, эффект от объявления, эффект
от анонса, событийный анализ, регрессионый анализ.
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TABLE OF CONTENTS
Table of Contents.............................................................................................................................6
Abstract............................................................................................................................................8
Introduction....................................................................................................................................10
Chapter 1. Theoretical Background of U.S. Bank Mergers...........................................................11
1.1. Merger & Acquisition Deals...............................................................................................11
1.2. M&A Activity in The U.S. Banking Industry....................................................................28
1.3. Current U.S. Bank M&A Market Outlook.........................................................................39
1.4. Research Description..........................................................................................................47
1.5. Summary.............................................................................................................................49
Chapter 2. Methodology of The Announcement Effect Research.................................................51
2.1. Event Study Methodology..................................................................................................51
2.2. Regression Analysis Methodology.....................................................................................60
2.3. Summary.............................................................................................................................72
Chapter 3. Results of The Empirical Analysis...............................................................................74
3.1. Data Sample........................................................................................................................74
3.2. Event Study Results............................................................................................................78
3.3. Regression Analysis Results...............................................................................................92
3.4. Managerial Implications...................................................................................................109
3.5. Research Limitations........................................................................................................110
3.6. Summary...........................................................................................................................112
Conclusion...................................................................................................................................114
List of References........................................................................................................................116
Appendix......................................................................................................................................123
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ABSTRACT
Master Student’s Dmitry E. Sopov
Name
Master Thesis The Announcement Effect of U.S. Bank Mergers: An Empirical Analysis
Title of Impacting Factors
Educational 38.04.02 Management
Program
Main field of Corporate Finance
study
Year 2020
Academic Marat V. Smirnov, PhD in economics, senior lecturer
Advisor’s Name
Description of the The goal of the master thesis is to examine the U.S. banking
goal, tasks and industry in regard to how the announcement of M&A deals affects the
main results stock price behavior and to how this behavior is influenced by other
factors.
The main objective of the thesis is to find answers for the
following research questions:
1. Is there a difference between acquiring banks’ and target banks’
abnormal returns?
2. Is there a difference between pre-announcement abnormal returns
and post-announcement abnormal returns?
3. When does the announcement get reflected in the stock price of
involved banks?
4. What are the factors – deal-related, economics-related, company-
related – affecting the abnormal returns of target and acquiring
companies? How and how strong do these factors affect the
abnormal returns?
It has been observed that the announcement effect is indeed
present on the U.S. bank M&A market. On average, acquiring companies
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suffer a slight loss of 2% as a result of the announcement, while target
companies enjoy a 16% return. No significant difference between the pre-
announcement and post-announcement abnormal returns of acquiring
companies has been observed. However, when it comes to target
companies, the post-announcement abnormal returns have been found to
be significant higher than the pre-announcement abnormal returns. The
announcement effect is getting reflected in the stock price of both
acquirers and targets right upon the announcement and not earlier than
that. That means that, on average, no pronounced insider trading has been
observed. However, for targets, there is a slight increase of abnormal
returns in the pre-run period, i.e. 3 days before the announcement. The
increase is not statistically significant on any of the days, but it might
serve a signal for the regulatory bodies to employ a case-by-case approach
towards detecting the insider trading.
The regression analysis made it possible to identify the factors that
impact the value of abnormal returns for acquirers and targets. When it
comes to the acquirers, it has been observed that such factors as the deal
value, the pre-merger performance of the acquirer and the relative size of
the target to the size of the acquirer affect the cumulative abnormal
returns (CAR). It is worth noting that a non-linear relationship has been
observed between the deal values and the CAR values, the pre-merger
performance and the CAR values.
As for the target banks, the following factors have been found to
have an effect on the cumulative abnormal returns: the deal value, the
method of payment, the pre-merger performance of the target and the
regulatory regime. In particular, a non-linear relationship has been
observed to exist between the deal value and the dependent variable.
Keywords Mergers & acquisitions, M&A, U.S. banks, announcement effect, event
study, regression analysis
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INTRODUCTION
The U.S. market is abundant for banks. Back in the 1980s, there were up to 15,000 banks.
Now, there are around 5,000 banks. Some banks went bankrupt during the recession period,
while a huge amount of them merged together. Because of this, there is much to examine in
regard to the M&A deals of U.S. banks. This is especially true for the current period – different
circumstances including softened regulation and low profitability speak in favor of yet another
flow of U.S. bank merger deals. If this turns out to be true, the results of a research on U.S. bank
M&A deals will come in really handy.
This thesis is concerned with the problem of the announcement effect in regard to the
U.S. banking industry. The announcement effect refers to the presence or absence of abnormal
returns whenever an event of interest arises. Thus, a bank merger announcement is the event of
interest in this research. The event study methodology is used to examine the abnormal returns.
As a result, it is possible to answer different questions about American banks’ M&A deals that
were announced during the period of 2010-2019.
Moreover, a regression analysis is to complement the event study. Upon getting the
results of the event study methodology, two regression models for acquiring and target banks are
constructed. Abnormal returns serve as dependent variables, while several other factors are tested
for their possible significant relationship with the abnormal returns being created as a result of
the announcement of the deal.
Chapter 1 is concerned with different theoretical and practical aspects of merger deals,
bank merger deals and U.S. bank merger deals. It is concluded by the description of the research
that is to be carried out.
Chapter 2 is concerned with the methodology being used for the research. Different
aspects of the event study methodology and regression analysis are addressed. The factors to be
included in the model are introduced and supported by the academic sources.
Chapter 3 presents the results of the conducted research. First, the event study
methodology results are presented: several hypotheses are tests, acquirers’ and targets’ abnormal
returns are compared. Then, the regression models are presented together with the economic
explanation of the significance of the results. The results are accompanied by the managerial
implications for the following potentially interested groups: stock traders, bank representatives
and regulatory bodies.
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CHAPTER 1. THEORETICAL BACKGROUND OF U.S. BANK
MERGERS
1.1. Merger & Acquisition Deals
Mergers & acquisitions (M&A) are a specific type of corporate restructuring deals that
involve two or more companies combining into one company as a result of the deal. Such a
combination may come in different forms: it may be that the bidder fully acquires the target; or it
may be that the acquirer acquires the target but the combined entity continues to operate under
the name of the target; or the combined entity may operate under the new brand. M&A deals are
a part of the corporate control market that additionally includes leveraged buyouts (LBO),
management buyouts (MBO) and other mechanisms through which the structure and/or the
ownership of the company can be changed. Apart from that, M&A deals serve as a key
instrument in the principal-agent theory. The management team that plays the role of an agent is
always threatened by a takeover that might occur in case the management team underperforms.
This, of course, concerns only the widely held public companies.
All in all, there are lots of issues concerning mergers & acquisitions: the most relevant of
them are covered in the sections below. They include:
 Types of M&A deals;
 Motives for seeking M&A deals;
 Economic gains of M&A deals;
 Financing of M&A deals;
 M&A legislative issues;
 M&A conflicts and takeovers.
1.1.1. Types of M&A Deals
The deal itself can take place in different forms, the most popular of which are merger,
acquisition of stock and acquisition of assets.
Merger implies that the bidding company takes responsibility for all the assets and
liabilities of the target company, which consequently leads to one unified entity being in place
instead of two different entities. This form of the M&A deal requires approval of more than 50%
of stockholders in both companies.
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The second form of the M&A deal is the acquisition of target’s stock by the buying
company. This can happen either with approval of the target’s management team or without it.
The latter situation is usually referred to as a hostile takeover. When the bidding company has
made its decision on the company it wants to acquire, one option is to contact the management
team with the offer. The other option is reach out to the target’s shareholders independently from
the management team and try to purchase a controlling stake of the outstanding shares. Either
way, once the buyer has succeeded in gaining control over the target, it can change the
management team no matter its opinion on cooperation with the new owners.
The third option is the acquisition of assets of the selling company by the buyer. To carry
out this procedure, a payment should be made directly to the acquired company. The payment is
being made simultaneously with the transfer of asset ownership rights to the buying company.
Usually this form of M&A is used after the target company has filed for bankruptcy.
Offenberg, Pirinsky (2015)1 distinguish two different types of corporate combinations in
the United States: mergers and tender offers. In a merger, the bidder reaches out to the target’s
board of directors. Together, they rule out a price for the merger. Once the price has been
defined, the target’s shareholders vote on whether they approve the deal. In a tender offer, the
bidder reaches out directly to the target firm’s shareholders. The bidder comes up with a price
per share it is willing to pay for each of the shares. The shareholders can either agree to the offer
or reject it.
The main tradeoff between a merger and a tender offer is between speed and price.
Tender offers can be completed within considerably shorter time than mergers. Moreover, tender
offers usually come together with higher premiums.
Bidders choose the tender offer structure when the target is strategically important to
them and they want to close the transactions as fast as possible. Targets understand that and,
therefore, they can drive a harder bargain. Importance of the target to the bidder increases the
demand for share and raises the reservation price of the target.
The authors conclude that deals taking place in competitive environment as well as deals
with few legislative restrictions on closing have a higher chance of being structured as tender
offers.
1
Offenberg, D. and Pirinsky, C. (2015) “How do acquirers choose between mergers and tender offers?”, Journal of
Financial Economics, Vol. 116, pp. 331-348
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1.1.2. Motives for M&A Deals
When a company decides to acquire or to merge with another company, the decision
usually comes together with strong motives that help to ground the decision in the eyes of the
board of directors. These motives usually stem from the desire to obtain some synergetic effects.
According to Brealey, Myers and Allen (2017)2, the motives for pursuing an M&A deal can be
the following:
 Economies of scale;
 Economies of vertical integration;
 Complementary resources;
 Surplus funds;
 Elimination of inefficiencies;
 Industry consolidation.
1.1.2.1. Economies of Scale
The motive of gaining economies of scale is a natural goal of horizontal mergers. This
synergy refers to seizing opportunities of cost reduction as a result of increased scale of
operation. However, economies of scale may not be necessarily associated with the economies in
the operations part. For example, costs can be reduced through the sharing of central services by
the newly formed company’s property.
1.1.2.2. Vertical Integration
Vertical integration describes the movement of a company up or down the production
process through the means of expanding its business. In this case, the expansion is achieved
through acquiring a different company. For example, an oil refinery can buy an oil extraction
business to mitigate the costs arising from the oil extractor’s margin. Sometimes the need for
vertical integration stems from the desire to make some key decisions in regard to the supply
line. These key decisions might not be possible if they lie in the hands of a company up or down
the production chain.
For example, extending the length of an oil transportation pipe so that it leads right to the
refinery can mean the reduction of huge amounts of logistics costs. However, the company that
has the ownership rights for the pipe might not be willing to extend the pipe for some reason. In
2
Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate Finance. New York, NY: McGraw-Hill
Education
12
this case, it might be wise for the refinery to expand its business down the production chain, as it
will allow to save lots of money on the transportation.
1.2.2.3. Complementary Resources
The motive of complementary resources means that each of the deal parties possesses
something particularly important that lacks something not less important being possessed by the
counterparty. The problem is that the importance of the possession can be fully realized only
when the other “ingredient” is not missing. Hence the need for the M&A deal arises.
For instance, a small IT company has a great product with unlimited potential for the
banking industry. However, this company lacks an infrastructure, an environment that could
allow their product to shine and to show their clients how great the product actually is. At the
same time, a big bank has been lacking such a disrupting decision for some time now, even
though its infrastructure with clientele is up and running. It is only natural for the bank to acquire
the small IT company so that they both are better off.
1.1.2.4. Surplus Funds
Sometimes companies have so much cash on their hands that they do not know how to
invest it. One way to use the excess cash is to distribute it between shareholders either by
increasing dividend payments or by repurchasing the shares circulating in the market. Another
way to use the cash is to try and expand the business through an acquisition of a company. If
there is too much cash on hands, then financing an M&A deal with cash is a perfect opportunity
to get rid of it.
On the other hand, the management team might be unwilling to use the excess cash at all,
i.e. both options are neglected. This can potentially mark such a company with a beacon that will
signal other companies on the market that the cash-rich company is not using its resources
efficiently. This will eventually lead to an attempt or several attempts of takeovers with the goal
to acquire the underused resources and put them to good use.
1.1.2.5. Elimination of Inefficiencies
The inefficiency of not using cash on hands wisely is only one out of a long list of
possible inefficiencies that can be a result of the management team’s underperformance. The
CEO of the company and their team be running the company poorly, which will sooner or later
send the signal to the market that the company is up for a management change. Of course, the
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management team will not give up so easily and will resort to different defensive mechanisms
that can turn the takeover process into an exhausting “siege”, both for the bidder and the target.
On the other hand, saving the power and influence is not necessarily the only goal of the
management team. Defensive mechanisms create grounds for negotiations and make the bidder
increase the price that is being offered. Thus, even if the inefficient management team loses the
“war”, it can come better off in terms of its financial position.
Once the inefficient company has been acquired, the management team can be changed
for a better one, so that the ugly duckling can finally turn into a beautiful swan as a result of the
M&A deal that has taken place.
1.1.2.6. Industry Consolidation
The industry consolidation factor refers to the situation when companies start to combine
their effort usually in the form of striking M&A deals. Sometimes the industry consolidation is
referred to as the merger wave.
There are different reasons that might lead to industry consolidation. Sometimes it is a
technological breakthrough that starts the merger wave. Sometimes it is a sudden legislative
change that makes it profitable to scale up the size of operations through mergers. Another
reason might be fierce competition that leaves small competitors no choice but to join forces in
an attempt to survive the pressure of industry giants. Also, it can be a financial crisis that makes
industry giants – either at their own will or by requests of the authorities – rescue failing
companies by acquiring them.
All in all, the consolidation usually allows the consolidating companies to cut costs and
gain significant economies of scale. It is more likely than not that without gaining these
economies of scale small companies would be completely outcompeted by those who have
nevertheless seized the opportunity.
One good example of the merger wave is the 1980s in the United States. Back in that
time, there were far too many banks with too much capacity. For years, the banks have been held
back by the legislation that forbid the interstate merger deals, i.e. the deals between banks with
headquarters in different states. Once the legislative act in question had been lifted, the U.S.
banks were happy to start an M&A frenzy that had lasted for years. This led to probably the
biggest merger wave that the banking industry has ever experienced.
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1.1.3. Economic Gains of M&A Deals
1.1.3.1. Calculation of Gains
All the motives of M&A deals eventually pursue the goal of achieving economic gains.
So, the next step is to understand how the economic gains of M&A deals can be measured.
According to the widely known M&A mantra, a deal is economically beneficial when the two
firms are worth more together than apart. Brealey, Meyers, Allen (2017) express this notion in
the following formula:
Gain=P V AB −( PV A + P V B ) =∆ P V AB ,
where PVA and PVB are present value of the firms A and B respectively, and PVAB is the present
value of the combined firm. Logically, when gain is greater than zero, the deal can be considered
economically beneficial. However, that is just the value side of the deal. Apart from that, there is
the costs side that should be accounted for. When speaking about the costs for the bidder firm, it
is the difference between the amount of money paid to the target and the actual value of firm B.
That is, everything that is considered a premium is the cost to the buy side of the deal.
Depending on the type of financing, the costs can be accounted for in two ways. If the
deal is financed by cash, the costs are estimated as follows:
Cost =Cash Paid −PV B
If the deal is financed by stock, the costs are estimated in the following way:
Cost =N∗P AB−P V B
In the equation above, N stands for the number of shares that the bidding company is
offering to the target, PAB stands for the post-merger announcement share price, that is once all
the benefits of the deal have been appreciated by the shareholder.
After accounting for both sides of the deal, an economic decision-making rule regarding
M&A deals can be outlined:
NPV =Gain−Cost =∆ P V AB −( Money Paid−P V B )
As in any rule including net present value (NPV), the investment is worth it when the
NPV is positive. Therefore, in case the NPV of a supposed M&A deal is positive, it is safe to
proceed with the deal.
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1.1.3.2. Bidder Gains vs. Target Gains
One popular field of study within the M&A topic is the distribution of gains in a deal. A
deal involves two parties, an acquirer and a target, but who gains the most, who earns higher
economic benefits?
Damodaran (2015)3 claims that the stock prices of acquiring firms fall down upon the
takeover announcement. However, in order to provide a reliable empirical evidence for the
answer, an event study methodology (ESM) is traditionally used. The ESM allows to find out if
mergers manage to create value using cumulative abnormal returns (CAR). The methodology is
widely used in numerous academic papers on the topic.
The classic, highly cited papers on these topics include Jensen and Ruback (1983) 4,
Jarrell et al. (1988)5 and Andrade et al. (2001)6.
Jensen, Ruback (1983) have found out that shareholders of target firms enjoy significant
positive abnormal returns around the announcement period. On the other hand, shareholders of
acquiring firms are less lucky: those acquiring firms that get involved in tender offers realize
small positive abnormal returns while acquiring firms in mergers experience zero returns. In
other words, target shareholder win while bidder shareholder do not lose.
In the work of Jarrell et al. (1988), the finding is the same: it is claimed that larger
premiums are being paid to target shareholders, while acquirers enjoy only mild gains.
Andrade et al. (2001) conclude that target companies win in merger transactions.
However, the situation is the opposite for acquirer shareholders: estimated abnormal returns are
negative and not statistically significant at conventional levels.
More recent studies come to the same conclusion. For example, Cornett et al. (2011) 7
explore how and if company returns in M&A deals are affected by investor anticipation. First of
all, the returns of bidding firms can be predicted with higher accuracy than those of target firms.
As for the difference in returns, the cumulative abnormal returns of target firms are larger than
those of bidding firms. This difference is partially attributed to the difference between investor
3
Damodaran, A. (2015). Applied Corporate Finance (4th ed.). Noboken, New Jersey: John Wiley & Sons
4
Jensen, M. and Ruback, R. (1983) “The Market for Corporate Control: The Scientific Evidence”, Journal of
5
Jarrell, G., Brickley, J. and Netter, J. (1988) “The Market for Corporate Control: The Empirical Evidence Since
1980”, Journal of Economic Perspectives, Vol. 2., No. 1, pp. 49-68
6
Andrade, G., Mitchell, M. and Stafford, E. (2001) “New Evidence and Perspectives on Mergers”, Journal of
Economic Perspectives, Vol. 15, No. 2, pp. 103-120
7
Cornett, M. Tanyeri, B. and Tehranian, H. (2011) “The Effect of Merger Anticipation on Bidder And Target Firm
Announcement Period Returns”, Journal of Corporate Finance, Vol. 17, pp. 595-611
16
anticipation towards the price of acquiring companies and anticipation towards the price of target
companies.
Shah, Arora (2014)8 have investigated the M&A announcement effect on a sample 37
M&A deal announcements in the Asia-Pacific region. Their main rationale was to understand
how M&A announcements impact the stock prices of companies involved in the deal and how
the returns of bidders compare to the returns of targets. This was done using the event study
methodology: abnormal returns were calculated during event windows of 2, 5, 7 and 10 days.
The result of Shah and Arora (2014) corresponds to the findings described above. That is, target
firms’ stock yields positive statistically significant returns while bidder stock returns are not
statistically significant across all event windows.
1.1.4. Financing of M&A Deals
Yet another part of the M&A equation is the form of financing of the deal. Rosenbaum
and Pearl (2013)9 list the following three method of financing an M&A deal: cash financing, debt
financing and equity (stock) financing.
There are certain factors that bidding companies take into consideration when choosing
the form of financing best for them. These factors include:
 Cost of capital;
 Balance sheet flexibility;
 Rating agency considerations;
 Speed and certainty to close the deal.
The cash financing option is often chosen by the companies who have excess cash on
their hands. It is an asset that should be put to good use, and using it to finance an M&A deal is
one way to do that. Cash financing is easily the cheapest form of financing when it comes to cost
of capital, as the only opportunity cost is the interest on the cash that could have been gained.
However, some companies tend to see cash as a means to raise external debt; therefore,
an opportunity cost of repaying debt with cash should be accounted for when assessing the cost
of capital. Moreover, companies with excess cash might have significant portions of it
accumulated in the branches abroad, so getting all the cash together to the home country will
come together with tax repatriation expenses.
8
Shah, P. and Arora, P. (2014) “M&A Announcements and Their Effect on Return to Shareholders: An Event
Study”, Accounting of Finance Research, Vol. 3 No. 2, pp. 170-190
9
Rosenbaum, J., & Pearl, J. (2013). Investment Banking (2nd ed.). Hoboken, New Jersey: John Wiley & Sons.
17
Debt financing is more preferable option than equity financing when it comes to cost of
capital. There are different debt options, including asking a bank for a revolving credit facility,
borrowing a term loan, issuing bonds/notes or commercial papers. The latter option is usually
feasible for the investment grave companies. One major obstacle here is that borrowing debt
usually goes hand-in-hand with the loss of flexibility and its negative perception by the rating
agencies. Therefore, debt financing is not the most popular option on the M&A market.
Finally, there is equity financing that is considered a stronghold when it comes to M&A,
especially to the large pubic deals happening on the market. On the one hand, this is the costliest
option in terms of financing. On the other hand, it is positively perceived by the rating agencies
as well as known for the flexibility in terms of the balance sheet payments, that is no
interest/principal repayments and/or covenants make the issue more complex than it already is. It
is advised to use the stock financing option when the share price of the bidder is high, both
absolutely and relatively to the target.
Sometimes target companies prefer the equity option over cash option as well. For
example, if the target believes that there is upside potential in the bidder’s stock price, the target
is sure to desire the stock option, as it will enhance the economic gains from the deal even more.
Apart from that, one thing that distinguishes the cash financing from equity financing is the
taxation. The target beneficiaries will certainly have to pay taxes on the cash they received from
the deal, while equity transaction will come together with no tax liabilities. Therefore, tax-averse
shareholders will more likely opt for the equity option if there is a choice.
Still, stock financing is usually less desirable than cash financing by the target. Again,
this is due to two reasons: acquirer price volatility and valuation procedures. Starting from the
merger announcement, it is hard to predict how the market will perceive the deal. The price
volatility of acquirer’s shares will certainly take place, and no one can say if the target’s
shareholders might actually end up with significantly lower economic gains than those that had
predicted during the negotiations stage. Also, stock financing is sure to come together with
tiresome and time-consuming valuation procedures. This is due to the fact that the target’s board
of directors has to be sure that the bargain they are driving is right and justified. In order to be
sure of that, a thorough due diligence procedure of the acquirer might be required.
Brealey, Myers and Allen (2017) outline two main differences between cash financing
and stock financing.
18
The first difference is that the cost of the deal is unaffected by the merger gains in the
case of cash financing. That is, the target cannot suffer from the negative market reaction on the
deal, as the target shareholders’ gains are not tied to the acquirer’s stock price. However, the
opposite situation can is observed when the stock is offered: the cost of the deal is affected by the
gains of the deal, as the amount of gains is what drives the market reaction. If the deal is
economically beneficial to the acquirer, the costs of the deal to the acquirer rise, as the economic
benefits gained by the target rise together with the acquirer’s stock price, and vice versa.
It is worth noting that while costs are dependent on the gains, the gains themselves
depend on how thoroughly the due diligence procedure of the target was conducted. That is, if
some negative fact that is connected to the target company and that had not been revealed during
the due diligence procedure comes up once the deal is announced, it is sure to affect the gains of
both the acquirer and the target negatively, as the gains of both sides are tied to the acquirer’s
share price. In this sense, stock financing option is mitigating the effect of possible over- or
undervaluation. If the target company chooses to behave unethically and to conceal some
negative facts during the negotiation stage, the plan will eventually backfire: the unethical
behavior will be punished by the decrease of the target’s economic gains. In other words, stock
financing serves as an incentive for the target to behave ethically during the deal negotiations.
The second difference between cash and stock financing stems from the problem of
asymmetric information. The acquirer company has the fullest amount of and the most precise
information about itself. Given all this information, it is usually the acquirer company itself that
can most accurately tell whether its stock is overvalued or undervalued. Given this fact holds
true, it is safe to assume that the acquiring company will adjust its behavior according to its
information. That is, if the bidder is optimistic and deems its stock undervalued, it is more likely
to finance the deal with cash, as the company does not want to share its potential post-
announcement gains with the target company’s shareholder. And vice versa, if the bidder is
pessimistic and finds its stock overvalued, it is more likely to go for the stock option.
It would be wise to assume that the target company is fully aware of this fact and in turn
will adjust its behavior accordingly. If the negotiators on the target side manage to notice that the
acquirer is trying to finance the deal with cash, they will either drive a harder bargain for the
amount of cash they want to receive or try to stick to the stock financing option. The opposite
will happen if the acquirer is offering its stock to finance the deal.
19
1.1.5. M&A Legislative Issues
A merger deal between companies, especially a large deal between public companies,
certainly has a potential to shake up the entire industry. The general concern is that such a
change in the market may undermine the competition. That is, every deal has a potential to hurt
consumers and illegally restrict other companies in their capabilities to compete. In order to
prevent the occurrence of these situations, all the merger deals are being constantly monitored by
the respective authorities that have a say on the subject.
In the United States, the Federal Trade Commission (FTC) and the Antitrust Division of
the Department of Justice (DOJ) are two main regulatory bodies that oversee the merger market
trying to identify and block potential competition-restricting deals (Brealey, Myers, Allen, 2017).
The procedures that are carried out by these two bodies are based on the antitrust laws
that have been enacted for the purpose of ensuring the fair competition in the market. The main
antitrust laws are:
 The Sherman Antitrust Act of 1890;
 The Federal Trade Commission (FTC) Act of 191410;
 The Clayton Antitrust Act of 191411;
 The Celler-Kefauver Act of 1950;
 The Hart-Scott-Rodino (HSC) Antitrust Improvements Act of 197612.
The Sherman Act is mostly aimed at preventing any forms of monopolization that might
occur on the market as a result of unlawful practices exercised by the companies. In turn, the
FTC Act was enacted to create a regulatory body, the FTC, that could oversee the market and
exercise its power in regard to the companies, enforcing the restrictions supported by the
Sherman Act and the Clayton Act in the process.
As for the merger deals, however, The Clayton Act is much more relevant and much
more powerful. The problem is that the Sherman Act does not directly address the unlawful
practices in the form of mergers that undermine competition. As a result, the Clayton Act was
enacted to do just that. The Act seeks to prohibit M&A deals in which the effect “may be
10
Federal Trade Commission Act. (2018, December 14). Retrieved April 30, 2020, from
https://www.ftc.gov/enforcement/statutes/federal-trade-commission-act
11
Clayton Act. (2018, December 14). Retrieved April 30, 2020, from
https://www.ftc.gov/enforcement/statutes/clayton-act
12
Hart-Scott-Rodino Antitrust Improvements Act of 1976. (2016, July 25). Retrieved April 20, 2020, from
https://www.ftc.gov/enforcement/statutes/hart-scott-rodino-antitrust-improvements-act-1976
20
substantially to lessen competition, or to tend to create a monopoly”. This relates to transactions
“in any line of commerce or in any section of the country”. The Clayton Act is widely used
today, even though it has gone through several amendments, the most relevant of which include
the Celler-Kefauver Act and the Hart-Scott-Rodino Act.
The Celler-Kefauver Act was enacted in order to close a loophole in the Clayton Act. The
latter did not directly prohibit the deals in the form of asset acquisition; this led to companies
exploiting this fact in their favor. Thus, the Anti-Merger Act (second name for the Celler-
Kefauver) imposed restrictions on the competition-reducing asset acquisitions, as well as on the
vertical and conglomerate mergers that could potentially limit competition. Previously, the
Clayton Act addressed only horizontal mergers.
The HSC Act introduces the main regulatory requirement for the major part of U.S.
merger deals: it requires companies to notify the FTC and the DOJ about the merger transaction
that is about to take place (Rosenbaum, Pearl, 2013). These notifications occur in the form of
filings regarding the transactions with the deal value higher than $78.2 million. To make a filing,
the deal parties are required to pay a filing fee with a size that depends on the deal value.
Thus, according to the U.S. legislation, both parties of the transaction, having reached a
definitive agreement, have to inform the following regulatory bodies about the upcoming deal:
the FTC, the DOJ, a specific industry-related regulatory body (if required), and a foreign
regulatory body, in case the major part of the operations of one of the parties takes place abroad.
Once the filings have been received by the respective bodies, the review process takes place.
When it comes to the FTC, the procedure is somewhat transparent: on the FTC website, one can
find “Horizontal Merger Guidelines”13, the analytical framework that is used for reviewing
horizontal mergers, as well as a guideline called “Merger Best Practices” 14 that outlines the
reviewing process step-by-step and helps to speed it up.
If there are any concerns regarding the deal, the regulatory bodies challenge the deal: the
FTC can file a civil suit and/or the DOJ can initiate a proceeding regarding the deal. If these
concerns happen to be complex antitrust issues, the deal may take longer time to clear, or the
deal may not close at all. If there are no concerns, however, the injunctions are lifted, and the
transaction can consummate once every required condition is met.
13
Horizontal Merger Guidelines (08/19/2010). (2020, April 30). Retrieved from
https://www.ftc.gov/sites/default/files/attachments/mergers/100819hmg.pdf
14
Reforms to The Merger Review Process. (n.d.). Retrieved April 30, 2020, from
https://www.ftc.gov/sites/default/files/attachments/mergers/mergerreviewprocess.pdf
21
1.1.6. M&A Conflicts & Takeovers
1.1.6.1. Friendly and Hostile Deals
The attitude of the deal is yet another characteristic of an M&A transaction. The deal
attitude refers to how both parties of the deal feel toward each other. A deal can be either
friendly or hostile. In the former case, the CEO of the bidder company simply reaches out to the
CEO of the target company and presents the offer details. Given the positive attitude of
management teams, boards of directors and shareholders of both companies, the deal
consummates after brief or no negotiations and will be considered upon friendly upon
consummation.
However, the scenario can be quite the opposite. The bidder company can make a tender
offer to the target company, but the offer is declined by the target for some reason. Then there
are two options left: the bidder either proceeds with pursuing its interests and trying to acquire
the target or backs off. In case further proceedings turn out successful, such a deal will be
considered a hostile takeover, as it has been consummated against the initial will of the target. It
is specifically stated that a hostile takeover is usually carried out as a tender offer. This is
because tender offers are historically considered effective mechanisms of corporate governance
that allow the bidders to overcome unwillingness of the target to be acquired on the proposed
terms (Offenberg, Pirinsky, 2015). According to the authors, a hostile takeover is likely to begin
with a bid that is called “preemptive”, or “blowout”, i.e. a bid with a significantly high premium.
This decision to make a preemptive bid serves two purposes. First, the bidder tries to send a
message to other potential bidders and repel them from coming up with their own bids. Second,
the bidder tries to make the bid high enough so that its rejection by the target’s board of directors
could be deemed “not in the best interests of shareholders”.
1.1.6.2. Factors Affecting Takeover Probability
But why do companies get targeted by bidders whose offers lead to the hostile deals?
This is due to the existence of the market for corporate control, i.e. the mechanisms that allow to
challenge the management team of a company and to change it in the process. If it can be
observed that a company is underperforming AND the major reason for its underperformance is
the ineptitude of the management team, someone – sooner or later – will want to change the
management team. Damodaran (2015) claims that underperformance can be both accounting-
based and market-based. For example, the returns on company’s projects can be used as a proxy
22
for measuring performance. If the returns are high, then the threat of a takeover is low. And vice
versa, given that the project returns are low, the company is more likely to be a takeover target.
The phenomenon of underperformance being a factor that increases the chance of a
takeover is investigated by Tunyi et al. (2019) 15. The authors analyze the dataset of M&A deals
that have taken place in the period of 1988-2017. Their main finding is that “poor management”
indeed increases the chance of a takeover. “Poor management” includes the efficiency of a
company in term of both accounting and market. Moreover, when the management team is
focused on short-term profitability of the company, it leads to the chance of company being
disciplined through a takeover as well. However, if the management team falls into the
“efficient” category and/or the management team works towards increasing the long-term value
of shareholders, then it lowers the probability of such a company being a target of a hostile
takeover.
Another factor that increases the probability of a takeover has been mentioned by
Damodaran (2015). The amount of debt is said to contribute to the takeover probability. If the
company has almost none debt, i.e. the company is underlevered, it is more likely to be taken
over than the company that is stuck in debts, i.e. the company that is overlevered. This is because
sometimes acquisitions are financed by the unused debt capacity of the target, at least partially. If
there is no debt capacity left, then this fact is sure to repel some or all of the bidders, completely
or temporarily, as the financing is harder. This has been empirically shown by Palepu (1986) 16.
In his research, his finding is that low values of leverage and growth, which measured as the
annual rate of change in the firm’s net sales, positively contribute to a company’s probability of
being taken over.
1.1.6.3. Reasons For The Target’s Hostility
Hostility, however, can arise in different forms and for different reasons. The simplest
reason is that the management team wants the bidder to raise their offer, and that is why the
initial offer is rejected. The management team hopes that the rejection will make the bidder raise
the stakes; however, the actual reaction does not always match to the expectations. A more
sophisticated reason for declining the offer is the management team’s fear of losing their
positions. This fear has a solid ground: in most cases, the management team of companies that
15
Tunyi, A., Ntim, C. and Danbolt, J. (2019) “Decoupling Management Inefficiency: Myopia, Hyperopia And
Takeover Likelihood”, International Review of Financial Analysis, Vol. 62, pp. 1-20
16
Palepu, K. (1986) “Predicting takeover targets: A methodological and empirical analysis”, Journal of Accounting
and Economics, Vol. 8, pp. 3-36.
23
have been taken over is replaced within one year since the deal. Finally, according to the
principal-agent theory, there is a chance that the management team truly cares for the
shareholders’ interests and therefore declines the tender offer, as they think that it the transaction,
if consummated, will not make the shareholders and the consumers better off.
It is worth mentioning that the management team’s uncooperative behavior grounded by
the reasoning of saving their positions is the worst case scenario, as in this case the takeover is
likely to be economically justified, and the target’s shareholders are the ones suffering in this
scenario. So, in order to prevent, or at least soften, this scenario, board of directors came up with
the mechanism of golden parachutes. Golden parachute is a term used to describe significant
payments to the management team in case the team is let go once the deal consummates. It is
easy to grasp the idea that the management team is more likely to agree to the tender offer when
they understand that there is a rather high compensation for losing their positions. Some
managers might probably seek out takeovers by themselves, as they want to get their hands on
the golden parachute money.
1.1.6.4. Takeover Defense Mechanisms
There are several mechanisms using which a management team can tackle the problem of
a hostile takeover. These mechanisms can be divided into two groups: pre-offer mechanisms (i.e.
shark-repellent techniques) and post-offer mechanisms. Brealey, Myers, Allen (2017) list the
following mechanisms with the pre-offer mechanisms group: level of deal approval, poison pill,
staggered board of directors, fair price, voting restrictions, etc. Every deal, whether it is hostile or
not, needs the approval of the target’s shareholders. Usually the required level of approval is just
50% + 1 vote, which is the majority of shareholders, However, the management team can come
up with the requirement that increases the necessary level of approval to 80%, which is
considered a super majority. No need to mention that making 80% of the shareholders to agree to
the deal is much harder than convincing mere 50% of your good intentions. Most likely, a
drastically higher premium will need to be paid in this case.
Poison pill is an action in regard to the company’s shares conditional on the amount of
shares that the potential bidder owns. In other words, once the bidder manages to accumulate a
certain portion of shares on hands, it triggers the poison pill that creates unfavourable conditions
for the takeover. There are many ways how the poison pill can be structured, it depends on the
creativity of the management team. For example, once the bidder accumulates x% of shares, the
24
company can issue a certain amount of new shares, thus decreasing the portion owned by the
bidder and never allowing it to come close to having the rights to affect the deal. Or, for instance,
the company can offer to sell its shares to everyone except the bidder at half the price, which
again eventually makes it harder for the bidder to acquire more shares. However, the opposite
situation is possible as well: the company can promise its shareholders (everyone except the
bidder) to buy their stock in the future at a price significantly higher than the price today but
lower than the expected price in case the hostile deal consummates. This will make the takeover
even more costly for the bidder, thus potentially repelling him from chasing the deal.
The mechanism called “staggered board of directors” implies the division of the board of
directors into two or three groups. Given that whole board is affiliated with the management
team, it becomes hard to overthrow the board, as all its members cannot be changed within just
one meeting. Two or three meeting will be required to change the contra-takeover board, in case
the hostile bidder decides to affect the deal consummation through the target’s board of directors.
Fair price mechanism is quite simple: it blocks any offer that values the company below
its fair price level. Voting restrictions mechanism is quite straight-forward as well: unless
approved by the board, the bidder with a significant proportion of shares has no voting rights in
regard to any company-related decisions.
Post-offer defenses include filing a lawsuit and/or asset restructuring. In case the target
finds that the potential takeover is anticompetitive or monopolistic in anyway, the company can
go to the court with a complaint on the actions of its bidder. This will most likely slow down, if
not block, the takeover process. Asset restructuring implies a different number of things. For
example, the target can buy an asset that the acquirer does not want to purchase. But eventually
the acquirer will have no choice but to purchase it together with the company if the acquirer
wants the deal to consummate. On the other hand, the target can purchase an asset that can
potentially create antitrust problems in case the bidder decides to proceed with the deal. Due to
the potential antitrust issues, the deal will likely bog down in the litigation process.
Sometimes the state where the target is residing can play its role in either blocking or
allowing the deal. There are state antitakeover laws, according to which the state’s attorney
general can block a deal if the deal can be considered unlawful according to the antitakeover
laws. According to Offenberg, Pirinsky (2015), these antitakeover laws have widely been
enacted in late 1980s and in early 1990s. The adoption of these laws made it possible to almost
25
completely get rid of hostile tender offers, as many of them ended up being stuck in multi-year
waiting periods.
1.1.6.5. Past The Defenses
No matter how hard the management team tries to repel the barbarians at their gates, the
chances are they can get the required approval of shareholders eventually. Given that the
management team has no choice but to act in the best interest of the shareholders, the deal
eventually takes place and the hostile management team likely gets changed.
However, overcoming takeover defenses can very well be the smallest problem of the
acquiring company. Significant problems might arise right after the takeover. These problems
might include but not limited to differences in corporate culture, differences in customer
relationship management, incompatibility of IT systems or difference in technological
development in general, etc. The larger the acquired company, the harder it is to align everything
with the acquirer’s state of business. But again, the alignment process is not the only problem:
while the alignment is being carried out, the business – that is, employees, customers, operations
– is most likely suffering from incompatibilities arising from differences between two
companies.
So, making the decision to proceed with the merger deal, it is wise to account for various
post-consummation problems that might arise. It is possible that incompatibilities can mitigate
some portion of economic benefits from the deal, if there were any in the first place.
One famous example of how a hostile takeover can go wrong is the acquisition of First
Interstate Bancorp by Wells Fargo in 1996 17. Two banks had completely different cultures: Wells
Fargo was focused on convenience for its clients while First Interstate Bancorp was famous for
what is called “relationship banking”. Once the merger consummated, Wells Fargo could not live
up to the expectations of its newly acquired customer base and consequently suffered significant
losses: in profits, in clients, in reputation.
Running the merged company turned into a nightmare. Lots of First Interstate Bancorp
left the company realizing their “golden parachutes” in the process. Wells Fargo experienced
problems running First Interstate Bancorp branches, so the new clients went to original Wells
Fargo branches. However, there was a deficit of personnel as well. As a result, the competitors of
17
Carlton, J. (1997, July 21). Wells Fargo Discovers Merging Is Hard to Do. Retrieved April 30, 2020, from
https://www.wsj.com/articles/SB869442371249244500
26
Wells Fargo managed to capitalize on this situation. They started effective ad campaigns that
allowed them to take away a significant part of market share from Wells Fargo.
Wells Fargo was sure that it could manage running the newly acquired asset, but hubris
of the management team took its tool and made the company pay the price for its
overconfidence.
1.2. M&A Activity in The U.S. Banking Industry

1.2.1. Introduction to The Banking Industry
Now that the main theoretical aspects of M&A deals have been covered, it is important to
consider the banking industry in terms of the specifics of its restructuring activities. As in any
merger-intensive industry, there should be some peculiarities, as will be later shown below. It is
worth noting that it is the structure of the U.S. banking industry is the underlying factor that
defines the intensity of the restructuring taking place within it. The U.S. banking industry is very
fragmented: there are 4,718 depository institutions operating in the U.S. as of 2018. The industry
used to be even more fragmented before 1980s, but due to the consolidation of U.S. banks their
number has shrunk from roughly 14,500 banks back in 1970s to the current number of 4,718.
Actually, there are some huge reasons lying behind such a massive restructuring process, and a
whole story to tell about how the process went through.
As for the reason for the initially enormous number of banks in the U.S. economy is the
initially set strict regulation that forbid both interstate banking and intrastate branching. Banks
were not allowed to have branches across different states, nor were they allowed to have several
branches within the state. This started to change in the 1970s. The consolidation process started
back then and is still going on.
The later subsections are going to cover different aspects of merger activity in the U.S.
banking industry, including why the mergers are happening, what banks gain from striking
merger deals and how legal environment played a major role in shaping the banking industry
starting from the 1970s.
1.2.2. Factors of Bank Merger Activity
Given the scale of the restructuring process in the U.S. banking industry, it can be
assumed that such a process cannot emerge out of nowhere. Obviously, there were some triggers
that affected the intensity of merger deals to a bigger or smaller extent. In their paper, Smith and
27
Walter (1998)18 name the following factors as those contributing to the merger activity of
financial services providers:
 Significant changes in government regulatory or economic policy;
 Solid economic or technological rationale for the restructuring;
 Companies are undervalued relative to their replacement values;
 Strong “bull” markets.
The regulatory changes are a widely accepted factor that sparks the merger activity. The
bank merger wave of 1980s and 1990s was majorly a result of the regulatory changes, i.e. a
result of the enactment of Garn-St.Germain Act and Riegle-Neal IBBEA. Not to mention the
legislation of each particular state that also contributed to the merger activity of banks, both
intrastate and interstate.
The economic and/or technological rational of merger activity was also widely present
during the turbulent period on the U.S. banking market. IT innovations enhanced the competitive
capabilities of financial services companies other than banks and thus worsened the competitive
outlook for banks. The same can be said about the rise of interest rates and the consequent
outflow of cheap capital from banks. Both these reasons indeed contributed to the merger
dynamics and thus are rightfully mentioned in the list above.
As for the companies being undervalued and “bull” behavior on the stock market, these
factors just make economic conditions more favorable for the possible increase of the merger
activity. It is only natural, as the rise of stock prices during the “bull” period will make it easier
for acquiring banks to finance merger deals with stock.
Smith and Walter (1998) mention some other, more specific, factors that have contributed
to the merger activity in the U.S. banking industry. These factors include the following:
 A massive shift in the industry structure;
 Increased competition from the inside and/or outside the industry;
 Technological changes;
 Legal changes carried out by the regulatory bodies.
18
Amihud, Y. and Miller, G. (eds). 1998. Banker Mergers & Acquisitions. Norwell, MA: Kluwer Academic
Publishers, pp. 21-36
28
The change in the industry structure means that there might be some serious changes in
the business models used by the companies in the industry. That is, some lines of business may
become less profitable or unprofitable at all, while a whole new line of business might emerge.
This is exactly what happened in the 1980s when lending business of banks became unprofitable
due to inflation and to the removal of interest rate ceilings. As a result, banks had to move its
focus from lending to some other, previously less traditional activities. Or, another way around
was to merge in order to compensate for inefficiencies created by the change in the industry
structure.
Increased competition basically refers to the points mentioned by Michael Porter in his “5
Forces” framework. When competition is on the increase, the only way to maintain profit levels
or even survive might be through striking merger deals. Again, the authors refer to the situation
in 1980s: financial institutions, other than banks, were on the rise due to different factors. Banks
had no choice but to answer the threat of competition from the outside. One way to do so was by
increasing the size of operations, which is easier to do through restructuring deals rather than by
greenfield or brownfield activities, especially during turbulent times.
Rapidly changing technology is yet another driving force of the merger activity in the
banking industry. It can lead to numerous consequences for the banking business: emergence of
new competitors, outdatedness of current business offerings, etc. Inability to keep up with the
speed of change is crucial when it comes to technology. This inability can be caused by different
factors: insufficient resources to invest into R&D processes, underestimation of the importance
of R&D investments, poor perception of the ongoing technological changes. When it is too late
to tackle the problem of technology innovation using own resources, external environment
comes into play. A bank can merge with a bank that has successfully adopted the required
technology in time. Or, a bank can merge with another bank to finally have a sufficient amount
of resources to address the problem technological development. The problem of rapid
technological change is extremely relevant to the current state of the U.S. banking industry. Due
to wide implementation and emergence of Industry 4.0 technologies, business operations of all
companies are under pressure of digitalization. Those who cannot digitalize their business are
losing out on opportunities to provide their clients with a more convenient, higher quality
service. However, as has been mentioned, admitting the need for digitalization is one story while
having enough resources for corporation-wide digitalization is a whole different story.
29
Obviously, industry giants, such as Citicorp, JPMorgan Chase, Bank of America, have a
sufficient amount of resources to invest into digital activities and provide their customers with
state-of-the-art banking services. However, this is not the case for small regional banks. They are
losing their clientele to giants because of insufficient amount of resources to invest into digital
activities. Given the context, one possible way out is to merge.
Finally, there are changes in legislation that historically have proved to be a major trigger
for M&A activity. A law giving affecting the operations of banks in this or that way can easily
lead to a consequent wave of restructuring deals, either because they are bound to seek efficiency
in the newly formed environment or they just want to exploit the loosened regulation and achieve
larger gains.
1.2.3. Motives And Benefits of Bank Mergers
Generally, there are motives lying behind the merger activity in any industry. Banking
industry is not in exception here. Some general motives mentioned in the previous sections still
persist, but they can be specified for the banking industry in particular. Smith and Walter (1998)
list the following synergies as motives for companies from the banking industry to engage in
merger activity:
1. Accessing information and proprietary technologies;
2. Increasing market power;
3. Reduce unit costs;
4. Achieve economies of scale;
5. Achieve economies of scope;
6. Achieve diversification;
7. Achieve certain tax benefits;
8. Satisfy management’s goals.
The first point about information is especially important when a bank is merging in order
to enter the market of another state. The acquired bank has accumulated the experience of
serving the consumers of another state. It also has reflected in the knowledge about serving the
market in another state, e.g. preferences of consumers in that state. Merging with a bank
possessing such experience and knowledge is probably the easiest way to gain access to another
state’s market and successfully operate there. On the other hand, it can be about proprietary
technologies, or know-hows, intellectual property, owned by another bank. In the modern world,
30
this can be about some specific features in banking apps that turned out to be so successful that
they got patented eventually. If an acquiring bank sees this patent as something that can add
value to the services provided by the merged bank, then gaining access to the target bank’s
technologies can serve as one of the motives for the deal.
The increase of market power can help an acquiring bank to become more dominant in
the market and thus be more flexible in setting the prices on the services it provides. As a result
of the merger increasing market concentration, cost-price margins can be widened without losing
much demand. For example, higher market concentration makes it possible for the banks to
decrease their deposit rates and thus decrease costs. On the other hand, banks with higher market
share have the power to increase their loan rates and thus raise their revenues. Apart from that,
an increase in size can make some operations more profitable, while a lower market
concentration would not have allowed to gain profits from these operations because of the
insufficient scale thereof. For example, this is the case for U.S. banks in the 1980s that tried to
compensate for the losses in traditional banking activities by engaging in off-balance sheet
operations. However, the scale of these operations sometimes was not enough, and so banks
could not succeed in their aims.
Reduction of unit costs becomes available through consolidation of infrastructure of two
banks. Redundant facilities and personnel are likely to be eliminated as a result of the merger.
The same goes for duplicate branch offices, tellers and any other infrastructure. For example, if
two banks had two competing branch offices located in the same area, now the merged bank can
keep just one office and provide service to the area without having to compete. Moreover, head
office costs are likely to be significantly reduced in case of merger, especially if the merging
banks had their headquarters located in the same state.
Economies of scale can be naturally achieved through the larger size of the combined
institution. Due to its size, it can provide financial services with lower unit costs. In other words,
it can produce the same output with a lower amount of inputs. How can this be achieved? For
example, it may be that the merged bank is able to offer several products at a cost lower than the
cost that would have been incurred by each of the banks operating separately (Piloff and
Santomero, 1998)19. Moreover, the management team of the merged bank might be more skillful,
experienced, etc., and this, in turn, will lead to the economies of scale.
19
31
Economies of scope in regard to the mergers of banks refer to a broader assortment of
financial services that can be offered by the merged bank. Economies of scope are often
associated with revenue efficiency. Now that the merged bank possesses a greater scope of
services, it can offer its customers more lucrative product mixes that will either attract more
customers or increase flows incoming from the current customers. The effect can be enhanced
through superior pricing strategies implemented by the management team, or through effective
sales or marketing programs. The same goes for cross-selling: abundance of financial products
makes it possible for the combined institution to offer some additional products to the customer
who initially wanted just one product.
As for the tax benefits, they can be achieved due to the increased size of the combined
institution. If a convex tax schedule is applied to the merged bank, then the expected taxed may
full, resulting in higher values of net income.
The final motive for merger is the satisfaction of management’s goals. When it comes to
mergers, there is often a common thing that serves as plays a role of both a motive and a problem
– managerial hubris. It describes a phenomenon when the management team is being
overconfident in their abilities to manage an organization. Oftentimes it happens that the
management team, seeing their success managing the acquiring bank, is sure that it will be able
to manage the target bank and the combined institution. However, this can easily be an
overestimation of abilities, and the management team eventually finds it hard to manage the
merged bank. In other words, an unrealistic view of skill and talent of the management team
leads to unrealistic ex ante expectations that exceed ex post performance. This motive, even
though it is quite a common one, does not necessarily lead to benefits, as managerial hubris is
associated with agency problems. The common view is that merger deals happening because of
the overestimation of skills and abilities by the management team contradict shareholders’ best
interests, hence the agency problems.
One other factor that is mentioned by Berger (1998) 20 is the diversification. The bank is
getting diversified either way, whether the deal is happening between banks in two different
states or between two banks operating in the same state. In the former case, it is mostly
geographical diversification. Geographic diversification is akin to portfolio theory: the more
states the bank is operating in, the greater the diversification and thus the lower the risk. For
20
32
example, if a bank is operating in a state that is experiencing an economic downturn, then it is
likely that the operations of this bank will suffer together with the state’s economy. However, if
the bank is operating in this state and in some other states, the state’s economic downturn will
only concern the operations of the bank in this state, i.e. operations in other states will stay in
accordance with the economic situation in other states. Apart from the geographic
diversification, there is also product and/or service diversification: for example, the merged bank
has a wider coverage of types of loans or maturity structures. This leads to economies of scope
mentioned above as well as to the merged bank’s ability to take on additional risk and earn
higher expected return for the same amount of equity and overall risk. It will also be possible to
shift into a higher revenue product mix with other relevant factors staying put. Overall, the main
effect of diversification is that it lowers the risk: for diversified banks, there is a lower risk of
bankruptcy. Moreover, earnings from business line in which consumers value stability will most
likely increase, as diversification positively affects stability of the merged bank.
Finally, it is worth mentioning that banks often decide to merge because they need to
change, which is often tied to some changes in the external environment. In this case, speed
might be the key issue. Undoubtedly, merging with another bank and thus getting the desired
change is a much faster way of achieving the goal than fostering the change independently from
the beginning. Of course, there will always be some problems associated with trying to make the
resources of both banks click, but it is a faster way than expanding into some specific state or
into several states on its own.
1.2.4. U.S. Banking Industry Consolidation And Legislative Issues
This section is concerned with thoroughly describing the circumstances that made it
possible for the commercial banks to achieve efficiency gains through the means of
consolidation. Major part of the subsection corresponds to the narrative provided by Mishkin
(1998)21 in his article on the topic.
Back in the 1970s, the traditional role of commercial banks was making loans financed
by the deposits. At that time, commercial banks had nothing to do with investment banking, as
per the United States Banking Act of 1933 22. Four provisions from that Act imposed restrictions
on bank activities: in particular, commercial banking and investment banking were separated.
21
22
Maues, J. 2013. Banking Act of 1933. The Federal Reserve History, November 22.
https://www.federalreservehistory.org/essays/glass_steagall_act
33
These four provisions of the Act are commonly referred to as the Glass-Steagall legislation, as
they were sponsored by Senator Carter Glass and Representative Henry B. Steagall.
The massive consolidation was triggered by two major reasons: low profitability of banks
and deregulation of the industry. Both these reasons stem from some other factors that eventually
indirectly contributed to the consolidation.
As for the profitability of banks, it turned out this way because of the fundamental
economic forces that led to financial innovations and undermined the traditional banking
activities. Eventually, the profitability suffered because of loss of both income advantages on the
asset side of the balance sheet and costs advantages on the liabilities side of the balance sheet.
Traditionally, the interest rates on deposits of consumers in banks were restricted by the
rate ceilings imposed by the Regulation Q23, one of the regulations of the Federal Reserve. Banks
could not pay interest rates on deposits higher than the imposed rate ceiling. The rate ceiling was
rather low, and so deposits were a cheap source of funds for banks, as they could make loans at
significantly higher rates. However, starting from the end of 1960s, the inflation started rising,
which made investors more sensitive to the returns they yield on their investments. Interest rates
paid on the deposits were not enough, and so the American investors started to withdraw their
funds in search of more fruitful investment opportunities. It started to get more difficult for banks
to raise funds, and so the regulatory bodies had to react. The Depository Institutions
Deregulation and Monetary Control Act of 1980 24 was enacted. That Act amended the
Regulation Q by effectively removing the rate ceilings on deposit accounts. This allowed
American commercial banks to offer higher interest rates on deposit and thus attract new
consumers. However, the damage had already been done – commercial banks had to compete
with other depository institutions (e.g. mutual funds) for deposits of consumers. Moreover,
increased interest rates on deposits meant that deposits became a more expensive source of
capital, which erode the cost advantage of commercial banks.
As for the reasons leading to the loss of income advantages, it was mostly the rise of
information technologies. Development thereof made it possible for companies to issue debt
directly to the public through securities. Instead of using banks to fulfill short-term credit needs,
companies could just access the commercial paper market. At the same time, finance companies
23
Cornell Law School. Capital Adequacy of Bank Holding Companies, Savings And Loan Holding Companies, And
State Member Banks (Regulation Q). https://www.law.cornell.edu/cfr/text/12/part-217
24
U.S. Congress. Depository Institutions Deregulation and Monetary Control Act of 1980.
https://www.congress.gov/bill/96th-congress/house-bill/4986
34
closely tied to the commercial paper market got better off as a result of this change, eventually
growing in size at the expense of banks’ losses. Moreover, information technologies made it
possible to evaluate the risk of making loans to businesses and individual consumers more
precisely. This led to the emergence of companies that did just that, again at the expense of
commercial banks’ loan business. All in all, the changes happening in the debt market because of
the rise of the information technologies certainly undermined the income advantages commercial
banks had successfully utilized before.
Having suffered in terms of both cost and income advantages, banks became less
profitable. In order to compensate for the losses or even survive, commercial banks had to
address the change in the environment. One way commercial banks resorted to was expanding
lending operations into new, riskier areas. Such areas included real estate or financing of
business restructuring activities, e.g. leveraged buyouts or takeovers. Another way to tackle the
problem of low profitability was to engage in sometimes more profitable off-balance sheet
activities.
Despite the measures to maintain adequate profit levels, the survival of many banks was
put into question. Eventually, this situation led to numerous bank failures that turned out to be a
factor contributing to the consolidation of the U.S. banking industry. There was another way to
achieve efficiency gains – through economies of scale. Economies of scale, in turn, can be
achieved through mergers. Bank mergers can be divided into two different groups – interstate
mergers, i.e. mergers happening between banks operating in different states, and intrastate
mergers, i.e. mergers happening between banks operating in the same state. However, until 1982,
both types of mergers were prohibited. First, there was the McFadden Act of 1927 25 that
prohibited national banks from branching outside their home state. Second, there was the
Douglas Amendment to the Bank Holding Company Act (BHCA) of 1956 26 that prohibited bank
holding companies from acquiring banks out of their home state.
However, the situation started moving slowly but steadily in the direction of deregulation.
In 1982, Garn-St. Germain Act of 198227 was passed in Congress. It was an amendment to the
25
Richardson, G., Park, D., Komai, A. and Gou, M. 2013. McFadden Act of 1927. The Federal Reserve History,
November 22. https://www.federalreservehistory.org/essays/mcfadden_act
26
Mahon, J. 2013. Bank Holding Company Act of 1956. The Federal Reserve History, November 22.
https://www.federalreservehistory.org/essays/bank_holding_company_act_of_1956
27
U.S. Congress. Garn-St. Germain Depository Institutions Act of 1982. https://www.congress.gov/bill/97th-
congress/house-bill/6267
35
BHCA regarding the purchase of out-of-state banks: in particular, out-of-state banks were
allowed to be purchased by the bank holding companies in case the former were failing.
Moreover, some bank holding companies started exploiting the loophole in the BHCA. In the
Act, a bank was defined as “a financial institution that accepts demand deposits AND makes
commercial and industrial (C&I) loans”. So, bank holdings started the expansion by opening
branches that offered just one of the two services that made up a bank. However, this loophole
was eventually closed by the Competitive Equality in Banking Act of 1987 28. Another way of
getting around the restrictions was by using ATMs. A bank could either own an ATM or pay a
fee for each ATM operation using an ATM that was owned by some other company. From the
legal point of view, the second option by no means implied that an ATM serves as a branch of
the bank that pays fees, so that worked out.
Garn-St. Germain Act was just the beginning of the deregulation process in the U.S.
banking industry. The process was latter lobbied by different interested parties. Large banks and
bank holding companies were the main proponents of the deregulation. They wanted to expand
their operations both within the states and across the states. Moreover, it cannot be denied that
they still experienced pressure from competing finance companies. Another interested party was
mid-sized and large business. Companies wanted their operations to be financed, and they
wanted them to be financed under best possible terms. To make that possible, commercial banks
had to operate in a more comfortable environment. Finally, there were state authorities that were
afraid of their banks failing for the reason of costs associated with recapitalizing the state
banking system in case of failures.
Eventually, pressure experienced by regulatory bodies from different sides led to
deregulation in the fields of both intrastate and interstate banking. At first, state authorities
allowed branching through purchasing of existing banks. Later, however, almost every state
allowed its banks to open completely new branches, i.e. without the need to purchase anything.
As for the interstate banking, restrictions on it were moved by the Riegle-Neal Interstate Banking
And Branching Efficiency Act (commonly referred to as IBBEA) of 1994 29. This Act effectively
overturned the restrictions imposed by the McFadden Act and the Douglas Amendment to the
28
GovTrack. Competitive Equality Banking Act of 1987. https://www.govtrack.us/congress/bills/100/hr27
29
U.S. Congress. Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.
https://www.govinfo.gov/content/pkg/BILLS-103hr3841enr/pdf/BILLS-103hr3841enr.pdf
36
BHCA. Upon the Act’s enactment, banks were granted the rights to merge freely both within a
particular state and out-of-state.
Some future legislative developments include (but are not limited to) the Gramm-Leach-
Bliley Act (GLBA) of 199930, the Dodd-Frank Wall Street Reform And Consumer Protection
Act (commonly referred to as Dodd-Frank) of 2010 31 and the Economic Growth, Regulatory
Relief and Consumer Protection Act (or the Crapo Bill) of 2018.
The GLBA played a major role in changing the regulatory environment in the U.S.
banking industry. It effectively repealed the part of the Glass-Steagall Act of 1933 that
prohibited cross-sector merger deals between commercial banks, investment banks and insurance
companies. With the enactment of the GLBA, all three types of institutions were allowed to
merge with each other without any restrictions. After this act was enacted, the merger between
the commercial bank Citicorp and the insurance company Travelers Group was allowed to
consummate by the Federal Reserve32. The Act is controversial in a way: some people say that
the Act let the culture of the investment banks sneak in more depository institutions and thus
partially contributed to the Great Recession in 2007-2008. One of the people holding this opinion
is Joseph Stiglitz, the winner of Nobel Prize in economics in 2001.
In 2010, the Dodd-Frank Act was enacted as a response to the Great Recession and to the
factors that contributed to it. Needless to say, the Act was focused on tightening the regulation in
a way that would minimize the chance of something like the Great Recession happening ever
again. The Act gave more power to the currently existing regulatory bodies, such as the Federal
Reserve and the Federal Deposit Insurance Corporation, as well as created some new bodies,
such as the Consumer Financial Protection Bureau33. Moreover, the Act included the Volcker
rule, a provision similar to the restrictions of the Glass-Steagall Act. According to the Volcker
rule, depository banks are prohibited from engaging in proprietary trading. This was done in
order to protect consumers from the consequences of banks’ greedy behavior.
30
Federal Trade Commission. Gramm-Leach-Bliley Act of 1999.
https://www.ftc.gov/tips-advice/business-center/privacy-and-security/gramm-leach-bliley-act
31
Commodity Futures Trading Commission. Dodd-Frank Act of 2010.
https://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm
32
Siconolfi, M. 1998. Travelers and Citicorp to Merge in Megadeal Valued at $83 Billion. The Wall Street Journal,
April 7. https://www.wsj.com/articles/SB891818705198998500
33
McGrane, V. 2010. Obama Signs Financial-Regulation Bill. The Wall Street Journal, July 21.
37
The Dodd-Frank Act, however, was actively criticized by adherents of conservative
views, including the republicans. Because of these, many efforts to repeal the Act were
undertaken. Eventually, the Economic Growth, Regulatory Relief and Consumer Protection Act 34
was introduced by Mike Crapo in the Senate in 2017 and later passed the Senate, the House and
got signed by President Trump in 2018. The Crapo Bill is considered a repeal to the Dodd-Frank
Act, as some provisions of the Act were severely amended by the provisions in the Bill. Perhaps
the most important thing about the Bill is that the Volcker rule was repealed for small banks with
less than $10 billion in assets. The enactment of the Act was, of course, considered a regulatory
relief for the banking industry and positively affected the mood of bankers on the Wall Street.
1.3. Current U.S. Bank M&A Market Outlook

Having gathered the relevant information on the merger activity in the U.S. banking
industry, it is logical to proceed with looking at the current state of the industry. A pretty good
outlook has been provided by Robert Armstrong, U.S. finance editor in the Financial times, back
in December 201935. In his article, Mr. Armstrong gives a brief outlook on the U.S. banking
industry in terms of restructuring activities. After outlining several supporting points, he comes
to the conclusion that a new merger wave is on its way, the only question is whether executives
can figure things out among themselves.
First of all, the need for M&A is based upon the profits that have been slowing down
throughout the recent years. This is mostly due to the low value of interest rates on the market.
Back in the mid of 2019, the Federal Reserve started decreasing the Federal Funds rate:
Fig. 1.1. The Federal Funds Rate from Jan, 2019 to Apr, 2020
34
U.S. Congress. Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018.
https://www.congress.gov/bill/115th-congress/senate-bill/2155
35
The Financial Times, 2019. Why 2020 could be a very busy year for US bank mergers, December 27. Retrieved
from: https://www.ft.com/content/0d0c2392-1fe4-11ea-92da-f0c92e957a96
38
This was sure to hit the profits of commercial banks, as their lending margins started to
decrease36. At that time, the margin of JPMorgan fell from 2.57% in 1Q 2019 to 2.49% in 2Q
2019, while Bank of America’s margin went in the same direction from 2.51% to 2.46%.
Banking is a market-sensitive business, so any volatility on the market, including that caused by
rate cuts and the trade war between the USA and China, negatively affects the industry. In light
of the rate cuts, Bank of America announced that the Federal Reserve’s decision is bound to hit
the income growth37. Smaller banks got affected by the low rates as well. In November 2019,
three banks collapsed, which had not happened on the banking market since 2017 38. The
regulatory bodies said that one of the banks suffered from its “unsafe and unsound practices”, but
the lower interest rates surely did hit the banks’ profitability.
Thus, low interest rates inevitably lead to lower margins and consequently to the reduced
profits the commercial banks can enjoy. This toughens the competition on the market and makes
banks look for other opportunities to grow, or to survive. One potential opportunity for growth is
through striking profitable M&A deals that can give benefits such as synergies, economies of
scale and increased efficiency.
Secondly, there is the domination of Big Four banks that makes the competition even
harder for banks with low amount of assets. JPMorgan Chase, Wells Fargo, Citibank, Bank of
America have at least $2 trillion of assets, which makes it easier for them to run any
digitalization projects that can enhance their customer attraction. Vice versa, such projects (at
least those that require a substantial amount of funding) are out of scope for other commercial
banks whose asset value does not match the likes of Big Four banks’ asset value. One possibility
to overcome this asset difference is consolidation. Given that CEOs of two merging banks are
able to negotiate the deal terms that will benefit the combined entity, there is a good chance that
the post-merger bank will be able to stand tall in the competition with the Big Four of the
banking industry.
Recently, some banks have shown an example of how to tackle the problem at hand
through M&A. Initially, Fifth Third Bank and MB Financial were the first ones to strike a deal
36
The Financial Times, 2019. Lower US interest rates squeeze bank lending margins, July 17. Retrieved from:
https://www.ft.com/content/655a0986-a7f5-11e9-b6ee-3cdf3174eb89
37
The Financial Times, 2019. Bank of America says Fed rate cuts will hit income growth, July 17. Retrieved from:
https://www.ft.com/content/3c75e608-a880-11e9-b6ee-3cdf3174eb89
38
The Financial Times, 2019. Three banks in America have gone bust within the past month, November 18.
Retrieved from: https://www.ft.com/content/1e14d524-05a6-11ea-9afa-d9e2401fa7ca
39
after the Dodd-Frank repeal of 201839. The deal value was $4.7 billion and came with a premium
of 24%. Then, there was a deal between Synovus Financial and FCB Financial with a value of
$2.9 billion40. The interesting thing is that both these deals come together with substantial
premiums paid by the buyer, and at the same time the share price of buyers slumped right after
the announcement. On the other hand, there is a subsequent deal between BB&T and SunTrust to
create the bank named Truist41. The deal value was $28 billion but did not come with any
significant premium. This M&A type, the “merger of equals”, allowed both parties to be better
off after the deal. Thus, those banks aiming for potentially successful mergers that will not
disappoint their shareholders in the short term should look into the “no premium” mergers. This
can eventually give the combined entities enough power to step up to the giant banks.
However, there is one thing that brings the time pressure to the equation is the political
factor connected to the U.S. presidential elections in the end of 2020. The connection is
established through the regulation policy of the banking industry. During the democratic reign of
president Obama, the Dodd-Frank Consumer Protection act was passed in the U.S. Congress thus
making regulations in the banking industry stricter. However, once the republican president
Trump came into power, he eased the effect of Dodd-Frank’s regulations through the Economic
Growth, Regulatory Relief and Consumer Protection Act of 2018. This action sure did please the
Wall Street banks42. However, the chances of Donald Trump’s re-election are not clear yet.
Moreover, the regulatory situation is unstable either way. If Mr. Trump manages to keep the
power in his hands, there is a chance that he will appoint new faces either to the Federal Reserve
or to other regulating bodies. The politicians appointed to their positions might change the
regulation so that the potential M&A deals become hard to carry out. If it is not done by the
Trump’s administration, then the democratic administration will certainly do it either way.
It is also important to consider the rapid changes taking place right now due to the
COVID-19 pandemic, as these changes have severely affected the economic environment,
including the banking industry. And there are some serious facts speaking in favor of grave
39
The Financial Times, 2018. Fifth Third fires starting gun on US bank consolidation, May 21. Retrieved from:
https://www.ft.com/content/80a149f0-5d07-11e8-9334-2218e7146b04
40
The Financial Times, 2018. Synovus investors spooked by Florida deal, October 4. Retrieved from:
https://www.ft.com/content/d2e2b1a0-c33b-11e8-8d55-54197280d3f7
41
The Financial Times, 2019. BB&T and SunTrust to combine in $66 bn US bank deal, February 7. Retrieved from:
https://www.ft.com/content/0330a7e0-2aca-11e9-88a4-c32129756dd8
42
The Financial Times, 2018. Wall Street welcomes Trump’s shift on regulation, February 21. Retrieved from:
https://www.ft.com/content/8b384298-1693-11e8-9376-4a6390addb44
40
consequences for the U.S. banks. In its report regarding the COVID-19 perspectives, Boston
Consulting Group (BCG) has placed banks in the group of hardest hit sectors, with their
performance measured as shareholder return over the course of February-March 2020 being one
of the lowest43. The same prediction has been made by the S&P rating agency 44: according to the
issued report, “the coronavirus crisis could wipe out a full year of US banking profits and push
the sector into the red for the first time in more than a decade”. The grim outlook is also
supported by the Federal Reserve claiming that the U.S. economy, including the U.S. banking
industry, is on its way to suffering a sustained medium-term economic damage.45
These claims by the experts are by no means an exaggeration, as there are several factors
that contribute to the falling operating results of banks. First of all, recently, the Fed has cut
down the Federal Funds Rate even lower in order to support the economy suffering from crisis 46.
Right now, the interest rates are close to zero: this has been made in order to make it easier for
everyone from consumers to small and large businesses to borrow money from banks. This
basically means that now the loan margins are suffering even more, negatively affecting the
profitability of banks – which, of course, is not welcomed by banks who are afraid of penalties
for breaching liquidity rules47.
To spice up the situation even more, a major part of loans that are being made by the U.S.
banks right now will likely not be returned. The surge in the provision for bad and doubtful debts
serves as an evidence of this: as banks prepare for the worst, as was back in the times of the
Great Recession48.
43
The Boston Consulting Group, 2020. COVID-19 BCG Perspectives, May 1. Retrieved from: https://media-
publications.bcg.com/BCG-COVID-19-BCG-Perspectives-Version4.pdf
44
The Financial Times, 2020. Coronavirus could wipe out US bank profits, says S&P, March 26. Retrieved from:
https://www.ft.com/content/9c44c27e-6edd-11ea-89df-41bea055720b
45
The Financial Times, 2020. Fed warns of lasting ‘medium-term’ economic damage, April 29. Retrieved from:
https://www.ft.com/content/ab0ef980-9788-4880-936b-a3f3b2c5bd6e
46
The Financial Times, 2020. Fed cuts US interest rates to zero as part of sweeping crisis measures, March 16.
Retrieved from: https://www.ft.com/content/a9a28bc0-66fb-11ea-a3c9-1fe6fedcca75
47
The Financial Times, 2020. Banks in talks with Fed on further steps to boost lending, March 22. Retrieved from:
https://www.ft.com/content/3d40c574-6c36-11ea-89df-41bea055720b
48
The Financial Times, 2020. US banks brace for surge in loan losses, April 18. Retrieved from:
https://www.ft.com/content/87189e79-a442-44b9-a699-7bce47b5bc64
41
Fig. 1.2. The combined provision for bad debt of selected banks from 2000 to 2020
Another grim factor contributing to the crisis-induced low profitability of banks is the fall
in credit card spending of U.S. consumers 49. This comes as no surprise, given the numerous
consequences of the coronavirus shutdown. Nonetheless, banks are expecting a major part of
their consumers to stop paying back the revolving debt on the credit cards taken on before the
pandemic.
All these things and many others contribute to the suffering profitability of U.S. banks.
For example, the published first quarter results of Wells Fargo indicate a drastic fall of 90% in
the bank’s net income50, and this might be just the beginning. Contrary to the average U.S.
market, the banking industry did not experience a stock price rebound after getting critically hit
by COVID-19 in mid-March51:
49
The Financial Times, 2020. US banks detail dramatic fall in credit card spending, April 16. Retrieved from:
https://www.ft.com/content/e4819dfd-4608-4430-b2c7-e70159907f7d
50
The Financial Times, 2020. Well Fargo net income falls 90%, April 14. Retrieved from:
https://www.ft.com/content/ba72fec2-8b6d-4e3a-8736-16a751006b18
51
The Financial Times, 2020. US bank stocks miss out on Covid-19 rebound, May 14. Retrieved from:
https://www.ft.com/content/7ce4944b-2d88-4d74-9126-adb4d0bee0b8
42
Fig. 1.3. The dynamics of Wells Fargo stock price from Jan, 2020 to May, 2020
However, as has been stated above by experts and academics, one consequence of low
profitability is the eventual seek for efficiency gains so that the economic damage can be
softened and the survival can be ensured. According to Jamie Dimon, the CEO of JPMorgan
Chase, the U.S. banking industry is likely to see more merger deals in the near future 52. He said
that he expected banks to deploy their capital more aggressively, especially towards acquisition
deals, as the Federal Reserve has shown its warm reception of recently struck merger deals.
Jamie Dimon believes that banks will engage in restructuring deals with both banks and non-
banks.
Another, more recent opinion has been expressed by Robert Armstrong, the
aforementioned U.S. finance editor of the Financial Times, during the live stream on Instagram
broadcasted on May 14, 2020. When asked about the perspectives of bank merger deals in the
current environment, he said that he was still expecting the banks to continue merging. This is
because the triggering factors still persist: low interest rates, consequent low profitability, slow
growth.
52
The Financial Times, 2020. Jamie Dimon says ‘door is open’ for more US bank deals, February 26. Retrieved
from: https://www.ft.com/content/5719b586-57dd-11ea-abe5-8e03987b7b20
43
Fig. 1.4. The livestream with Robert Armstrong in the official Instagram account of the FT
Moreover, the global pandemic further enhances the existing factor of digitalization that
contributed the need for consolidation. One of the cost-cutting initiatives employed by banks was
closing the branches53. JPMorgan Chase vowed to close around 1,000 of its branches in mid-
March. However, in order to maintain the scope of services provided to its consumers and to
compensate for the falling profits, banks decided to put further emphasis on digitalization
activities54. And it turns out that people are satisfied with the newly gained experience of digital
banking. According to the research conducted by BCG, a significant part of consumers of bank
services will visit bank branches less frequently after the coronavirus shutdown goes away:
53
The Financial Times, 2020. JPMorgan to close 1,000 Chase branches due to pandemic, March 18. Retrieved from:
https://www.ft.com/content/e3c1ca16-6942-11ea-800d-da70cff6e4d3
54
The Financial Times, 2020. US banking’s digital push; processing with Poynt; Revolut’s growing plangs, May 11.
Retrieved from: https://www.ft.com/content/fd1f31d8-918c-4586-b991-60d562d355b3
44
Fig. 1.5. The attitude of bank consumers worldwide towards using bank branches in the future
This means two things for the prospects of bank mergers. First, the future of banks lies in the
digitalization activities even more now. Given the scarcity of resources at disposal of smaller
banks, it might be safe to assume that small banks will have no choice but to consolidate their
resources in an attempt to compete with the giants of the industry in the field of digitalization.
Second, banks will likely have to sell off existing branches due to the lower number of visitors
and hence decreased efficiency. This process is easier to do in a consolidated manner when an
executive team that is more experienced in managing branches controls the process. These
changes in the environment largely affect small and mid-sized banks, and apparently these
changes will enhance the ongoing growth of mid-market bank mergers55.
Fig. 1.6. Value and fees for mid-market M&A deals from 2001 to 2019
55
The Financial Times, 2020. Mid-market M&A: let’s get small, y’all, February 24. Retrieved from:
https://www.ft.com/content/b3d66f79-90a9-46e8-9393-82048ef16fdb
45
The mid-market M&A deals are getting popular, and the likely response of the U.S.
banking industry to the threats posed by the crisis will correspond to the existing trend.
All in all, there is much attention drawn to the field of U.S. bank M&A deals despite the
ongoing crisis. Stakes are high, as well as the potential growth, or at least higher efficiency.
Thus, taking into account all these circumstances, it is safe to assume that a research on the
M&A deals between American banks is more than relevant to the current agenda of the U.S.
banking industry.
1.4. Research Description

As has been shown in the previous section, the current conditions on the U.S. bank
market are all in favor of a possible consolidation wave. The same opinion was expressed by the
industry experts back in 2019, including Morgan Stanley 56 and Oliver Wyman57. In turn, a
potential consolidation speaks in favor of conducting a research on how the U.S. bank merger
deals have been going past 10 years. Such a research will be useful for two reasons. First, it will
provide a fresh look of the U.S. bank M&A market in terms of short-term market reaction to the
deal announcement. No research has analyzed the announcement effect of the most recent deals
in the second half of 2010s, which is a research gap. Second, given the rising tense on the
market, this research will provide all market participants, including but not limited to traders,
deal parties, regulators, with a heads-up on the nature of the announcement effect on the U.S.
bank M&A market in 2010s. In other words, the goal of the proposed research is to examine the
U.S. banking industry in regard to how the announcement of M&A deals affects the stock price
behavior and to how this behavior is influenced by other factors.
The proposed research will focus on the short-term market reaction on the announcement
of merger deals. The research will consist of two parts: an event study analysis and a regression
analysis. The event study will focus on the first part of the research goal. That is, it will focus on
how the market has reacted to U.S. bank M&A announcements during the period of 2010-2019.
In turn, the regression analysis will address the second part of the research goal. It will go a step
further by exploring possible reasons measured by regression variables. In other words, the
regression model will try to answer the questions why the values calculated in the event study are
56
A New Age of U.S. Bank Mergers Ahead? (2019, March 19) Retrieved May 10, 2020, from
https://www.morganstanley.com/ideas/us-bank-mergers-2019
57
The Coming Wave of Consolidation of U.S. Regional Banking: Reasons for Skepticism (2019) Retrieved May 10,
2020, from https://www.oliverwyman.com/our-expertise/insights/2019/oct/the-coming-wave-of-consolidation-of-us-
regional-banking.html
46
what they are. Thus, the first part of the research will be more of a descriptive study, while the
second part will an explanatory study focused on identifying causal relationships between the
returns and examined factors.
In accordance with the research goal, the proposed research is going to answer the
following research questions:
1. Is there a difference between acquiring banks’ and target banks’ abnormal returns?
2. Is there a difference between pre-announcement abnormal returns and post-
announcement abnormal returns?
3. When does the announcement get reflected in the stock price of involved banks?
4. What are the factors – deal-related, economics-related, company-related – affecting the
abnormal returns of target and acquiring companies? How and how strong do these
factors affect the abnormal returns?
Question 1, question 2 and question 3 contribute to answering the first part of the
research goal concerned with how the stock market reacts to deal announcements. These
questions can be answered using the event study procedure. Question 4 and question 5 address
the second part of the research goal regarding factors that can further adjust the stock price
behavior around the announcement period. These questions will be answered using the
regression analysis.
The proposed research is supposed to be of practical use to the following parties: stock
traders, bank representatives and bank decision makers, and regulatory bodies.
The patterns of the bank M&A market that will be identified in the research can help
stock traders adjust their trading strategies accordingly. The research results can provide the
stock traders with an empirical foundation based upon which they can enhance their decision-
making process and get a chance either to increase their trading profits or to reduce their trading
losses. For example, the research results will likely give an insight into how quick a trader has to
be in order to get their piece of “pie”, which results from the market reaction from the deal
announcement.
The representatives of banks that are involved in the deal can get a better understanding
of how the market is likely to react to the announcement of their deal. The directors from the
board will know whether they should expect a stock price increase or rather a fall. Also, they will
know which factors might contribute to this or that direction of stock price movement. Knowing
47
all this can help the bank decision makers to make sure that the actual market reaction
corresponds to their expectations formed by the research results. If they notice a mismatch
between the reality and the expectations, it will serve as a signal for them to look deeper into the
issue. Moreover, understanding of the nature of the announcement effect can contribute to the
activities of the investor relations departments of merging banks. Shareholders might not be
happy with the observed stock price movement, or they just might not understand it. In turn, the
results of this research can be used by the investor relations department in order to communicate
the explanatory message to the shareholders in the right way.
Finally, the results of the research can prove to be useful to the regulators overseeing the
U.S. bank M&A market and the U.S. M&A market in general. The event study results will show
when the announcement effect start getting reflected in the stock price of the banks involved in a
particular deal. If there are no abnormal returns observed before the deal announcement, it will
prove that the regulatory bodies overseeing the market and preventing unlawful activities such as
informed trading are doing their job well. On the other hand, if some statistically significant
abnormal returns can be observed right before the announcement, then it will be a good reason
for taking a closer look into the issue.
1.5. Summary
This chapter has laid the foundation for the research that this paper is devoted to. The
thesis is concerned the topic of the announcement effect in regard to the U.S. bank M&A market.
First, the most important concepts of merger deals in general have been outlined using
academic sources as well as real cases serving as examples. Some general issues regarding the
M&A deals have been covered. The question why the companies are engaging in merger deals
has been answered through naming the most common motives and gains companies achieve
from merging. The structure of deal financing and its importance have been discussed. Finally,
the importance of legal environment has been emphasized.
To elaborate on the topic, the specific of bank merger deals in the United States have
been described based on the academic literature. Factors that affect the frequency of deals have
been mentioned. It also has been described how banks differ in terms of motives for merger and
benefits they gain from engaging in the restructuring activities. The section has been concluded
with a thorough description of the regulatory environment affecting the U.S. bank merger
48
market: this has been done together with describing the main milestones the market has gone
through over the years.
Moving on to the modern times, the U.S. bank merger market outlook has been presented
mainly with the support of the Financial Times business periodical. It has been shown that
merger market is in the active state right now, as there are several factors contributing to
potential restructuring activities. The current crisis induced by the COVID-19 pandemic and its
possible effects on the U.S. banking industry have also been taken into account. Some reports
provided by the Boston Consulting Group (BCG) have also contributed to the outlook.
Finally, the chapter closes with the section devoted to the outline of the research, whose
relevance has been shown by the previous section. The research will be concerned with
examining the announcement effect of U.S. bank mergers. First, the nature of the announcement
effect itself will be examined through the event study methodology (ESM). Then, it will be
examined if and how the ex-ante factors surrounding the merger deal affect the announcement
effect (if any). This will be done by the means of the regression analysis methodology.
Chapter 2 will be concerned with describing the theoretical aspects of the proposed
research methodologies, as well as with the exact parameters of these methodologies that will be
used in this research. Chapter 3 will proceed with presenting the results of the research in two
parts: results of the event study methodology and results of the regression analysis.
49
CHAPTER 2. METHODOLOGY OF THE ANNOUNCEMENT
EFFECT RESEARCH
2.1. Event Study Methodology
2.1.1. Introduction To The Event Study Methodology
As has been mentioned in section 1.4, an event study is required to analyze the
announcement effect associated with U.S. bank merger deals. Event study approach, or the event
study methodology (ESM), has been thoroughly described by MacKinlay (1997) 58, whose work
on the issue of event study is one of the most prominent one. Some previous, not less prominent
works on the ESM, include the papers of Brown and Warner (198059, 198560).
An event study can measure the effect that is created by a particular event on the value of
a company. However, such a measurement can take place only if the market is acting rationally,
i.e. the reaction of the market gets reflected in the stock price immediately upon the
announcement of the event. That is why the phenomenon that the ESM aims to measure is called
the announcement effect.
The announcement effect can stem from a number of different events. The most common
events associated with the announcement effect are merger deal announcements, earnings
announcements, the issuance of equity or debt. However, there are some other fields, not
necessarily finance-related, where the ESM can be useful. For example, the ESM can be used to
measure the effect of regulatory change on the value of a company, which is more of a legal
issue. Still, in the majority of cases, the announcement effect is measured in regard to the stock
prices.
The event study methodology consists of the following steps:
1. Defining the event of interest;
2. Defining the event window;
3. Defining the sample;
4. Measuring the abnormal returns:
58
MacKinlay, A.C. (1997) “Event Studies in Economics and Finance”, Journal of Economic Literature, Vol. 35, pp.
13-39
59
Brown, S.J. and Warner, J.B. (1980) “Measuring Security Price Performance”, Journal of Financial Economics,
Vol. 8, pp. 205-258
60
Brown, S.J. and Warner, J.B. (1985) “Using Daily Stock Returns: The Case of Event Studies”, Journal of
50
a. Selecting the normal performance model;
b. Defining the estimation window;
c. Calculating the abnormal returns;
5. Aggregating the abnormal returns;
6. Testing the hypotheses;
7. Conducting any relevant additional analysis;
8. Presenting the results.
Once all the steps have been gone through, the event study can be considered completed.
The listed steps are thoroughly discussed in the next section.
2.1.2. The Event Study Procedure
2.1.2.1. Steps 1-3: Defining The Event, Event Window And Sample
The first step is to define the event of interest. Some examples have already been
mentioned: it can be a merger announcement, or earnings announcement, or something else.
The second step is to define the event window. The event window is the time period in which the
stock prices of the event-related companies will be examined. It can be seen what the event
window is on the figure below (fig. 2.1):
Fig. 2.1. Event study time periods

In the figure above, the event is define as τ = 0. It means that the event of interest has
taken place on that particular day. The period right around the event day is called the event
window and is limited by the values τ = T 1 +1 and τ = T2. The period before the event window,
which starts on day τ = T0 +1 and ends on τ = T1, is called the estimation window. The estimation
window is used for the constructing the normal performance model, which will be described on
step 4. Time from τ = T2 +1 to τ = T3 is called the post-event window.
Once the event window has been defined, it is required to define the sample which will
be examined using the ESM. Usually this step requires selecting a set of criteria according to
which the sample collection procedure will be carried out. Company industry or company market
value can serve as examples of such criteria.
51
2.1.2.2. Step 4: Measuring The Abnormal Returns
After the sample procedure has been done, the next logical step is to finally measure the
abnormal returns associated with the examined event. This step is broken down into several
consecutive substeps. But first, it is needed to define what the abnormal returns are. MacKinlay
(1997) defines the abnormal return as “the actual ex post return of the security over the event
window minus the normal return of the firm over the event window”. Mathematically, the
abnormal return is defined as follows:
A Riτ =R iτ −E ( Riτ|X τ ) ,
where ARiτ, Riτ and E(Riτ|Xiτ) are the abnormal, actual, and normal returns respectively for time
period τ. Xτ is the conditioning information for the normal return model.
In turn, the normal return is defined as the expected return of the company as if the event
never took place. Thus, the first things that needs to be done is to construct a normal
performance model. This model, based on the stock price returns during the estimation window,
allows to predict the “normal” returns that could have been expected without the event taking
place.
There is a number of normal performance models that can be used in the ESM. Usually
these models are divided into two groups: statistical models and economic models. Statistical
models include the constant mean return (CMR) model, the market model and the factor model.
Economic models include factor models, capital asset pricing model (CAPM) and arbitrage
pricing theory (APT) model.
The constant mean return model is constructed under the assumption that the mean return
is held constant through time. The CMR model looks as follows:
R¿ =μi +ξ ¿ ,
where Rit is the period-t return on security and ξit is the time period t disturbance term for
security i.
A stable linear relationship is assumed to exist between the company return and the
market return. The CMR model is the simplest model that can be used as a normal performance
model in the ESM. Brown and Warner (1985) find that the model often produces the results that
are not significantly different from more complex models.
52
The market model is defined as a relationship between each return in the estimation
window and the market portfolio return on the same day. Mathematically, the model is defined
as follows:
R¿ =α i+ βi∗Rmt + ε ¿ ,
where Rit and Rmt are the period-t returns on security i and the market portfolio, respectively, and
εit is the zero mean disturbance term. α i and βi are the parameters of the model. Market returns
are usually presented by some index returns, such as those of Dow Jones, or by stock exchange
indices, such as those of NASDAQ or NYSE. The market model can be considered somewhat
superior to the CMR model, as it allows to reduce the abnormal return variance by reducing that
part of the return that is associated with variation in the market’s return. Consequently, this can
improve the detection of event effects.
The factor model’s motive is to further increase the variance in the abnormal returns by
taking into account other factors that may affect company’s returns. For example, the factor
model can account for industry indices or for the returns of companies that have characteristics
similar to the examined company. However, the gains from using the factor model are quite
limited. This is due to the fact that added explanatory power is rather small, which in turn allows
to decrease the variance in abnormal returns to a small extent.
The CAPM model and the APT model attempt to be more accurate in predicting returns
by casting economic-related restrictions on the statistical models. The CAPM model was widely
used in 1970s until it was discovered that the event study results might be sensitive to the
specific restrictions introduced by the CAPM. As it is not necessarily true that all the restrictions
will be fulfilled, the model has lost its popularity in regard to the ESM since then. In turn, the
APT model allows to compensate for CAPM’s restrictions, but the added explanatory power is
not worth the effort, as CAPM’s restrictions can be neglected simply by using statistical models.
Once the normal performance model has been chosen for the ESM, it is necessary to
define the estimation window, i.e. the number of days corresponding to the number of stock
returns that are going to be used to constructing the normal performance model. According to
MacKinlay (1997), it is usually enough to use the 120-day estimation window. Shah and Arora
(2014) stick to this recommendation, while Sachdeva et al. (2015) 61 estimates the normal
performance model using a 40-day event window, which is not necessarily enough.
61
Sachdeva, T., Sinha, N. and Kaushik K. P. (2015) “Impact of Merger and Acquisition Announcement on
Shareholders’ Wealth”, Delhi Business Review, Vol. 16 No. 2, pp. 19-36.
53
The next step is to construct the normal performance model using the returns from the
estimation window, predict expected returns according to the model and calculate the values of
abnormal returns by deducting the expected returns from the actual returns on each day of the
event window.
2.1.2.3. Steps 5-6: Returns Aggregation & Hypothesis Testing
After the abnormal return values have been obtained, it is necessary to analyze them. For
that, some aggregation of values is needed. There two different ways to aggregate abnormal
returns: for each stock across days and for each day across companies. The former value is called
the cumulative abnormal return and is mathematically defined as follows:
τ2
CA Ri ( τ 1 , τ 2 )= ∑ A Riτ .
τ=τ 1
CARi(τ1, τ2) is the cumulative abnormal return for stock i during the period from τ1 to τ2
where T1 < τ1 ≤ τ2 ≤ T2.
The aggregation across companies is measured by the value of the average abnormal
return, which is defined as follows:
N
1
AA Rτ = ∑ A Riτ ,
N i=1
where AARτ is the average abnormal return for event period τ and N is the number of events in
the sample, i.e. the number of examined companies or stocks.
Finally, there is the value of cumulative average abnormal return (CAAR), which can be
obtained either by averaging the CARi(τ1, τ2) across i or by summing all the AARτ across τ:
N τ2
1
CAAR ( τ 1 , τ 2) =
N
∑ CA Ri ( τ 1 , τ 2 )= ∑ AA Rτ
i=1 τ =τ 1
Once all the necessary aggregated values have been obtained, it is possible to test
different hypotheses in regard to the statistical significant of the obtained values. The simplest
statistical tests in regard to the abnormal returns fall into two categories: testing the statistical
significance of mean and testing the difference between two means of two different samples. For
example, the former procedure allows to check if, on average, abnormal returns were statistically
different from zero on day τ for all events. The latter procedure allows to check if cumulative
abnormal returns before the event were statistically different from cumulative abnormal returns
after the event.
54
The statistical significance of mean can be tested using the t-test that comes together with
the following null and alternative hypotheses:
H 0 : μ=μ 0
H 1 : μ ≠ μ0
The null hypothesis suggests that there is no statistically significant difference between
the population mean and the hypothesized value, while the alternative hypothesis states that there
is statistical difference between them. In order to test the null hypothesis against the alternative,
the value of t-statistic has to be calculated:
X−μ 0
t=
s
√N
where X , μ, s and N are the sample mean, hypothesized mean, the sample standard deviation and
the sample size respectively. The t-statistic follows a Student’s t distribution with N-1 degrees of
freedom.
The procedure for testing the difference between two means of two different samples is a
bit more complex. Because there are two samples, they do not necessarily have equal variance,
which happens to determine the test that should be used for testing the difference between
means. Therefore, first the standard deviation difference test should be run. The null and the
alternative hypotheses in this test are as follows:
2 2
H 0 :σ 1−σ 2=0
2 2
H 1 : σ 1−σ 2 ≠ 0
In order to test the null hypothesis against the alternative hypothesis, an F-test for testing
the equality of two variances should be run. The F-statistic can be calculated as follows:
2
S1
F= 2
,
S2
where S21, S22, N1 and N2 are variance of sample 1, variance of sample 2, size of sample 1 and size
of sample 2 respectively. The F-statistic follows an F distribution with N 1 – 1 and N2 – 1 degrees
of freedom.
Once the relationship between variances of two samples has been identified, it is possible
to decide which test should be used for testing the difference between two means. If there is no
statistically significant difference between two variances, then the pooled-variance t-test for the
55
difference between two means should be used. However, if there is statistically significant
difference between two variances, then the Welch’s t-test for the difference between two means
should be used. Either way, the null and the alternative hypotheses are as follows:
H 0 : μ1−μ2=0
H 1 : μ 1−μ2 ≠ 0 ,
where μ1 and μ2 are population means of sample 1 and sample 2 respectively.
The pooled-variance t-test uses the following t-statistic for testing the null hypothesis
against the alternative hypothesis:
( X 1− X 2 )−( μ1 −μ 2 )
t= ,
√ S
2
p
( 1
+
1
N1 N2 )
where S2p is pooled variance, X 1 and X 2 are sample means from population 1 and population 2
respectively. The value of pooled variance can be calculated as follows:
( N 1 −1 ) S 21+ ( N 2−1 )∗S 22
S2p= ,
( N 1 −1 ) + ( N 2−1 )
where S21 and S22 are samples variances from population 1 and population 2 respectively. The
calculated t-statistic follows a Student’s t-distribution with N1 – N2 – 2 degrees of freedom.
The Welch’s t-test uses the following t-statistic for testing the null hypothesis against the
alternative hypothesis:
X 1−X 2
t=
√
2 2
s1 s2
+
N1 N2
This t-statistic follows a Student’s t-distribution with v degrees of freedom. The value of
v is calculated as follows:
( )
2
s 21 s 22
+
N1 N2
v=
( ) ( )
2 2 2 2
1 s1 1 s2
∗ + ∗
N 1−1 N 1 N 2−1 N 2
2.1.2.4. Steps 7-8. Additional Analysis & Results Presentation

After testing all the hypotheses required for the research, some other directions can be
explored. For example, an association between the abnormal returns and some event
56
characteristics can be further examined through a cross-sectional regression. If the researcher is
interested in knowing the sources of the abnormal returns and has multiple hypotheses in regard
to what those sources might be, it is possible to simply run a cross-sectional regression on the
hypothesized influencing factors. Furthermore, the role of sampling interval can be examined.
Usually daily data is used for the ESM, but it is possible to use weekly or even monthly data for
some events, The changing of the sampling interval can be used to examine the power of the test
statistic used to signify the presence of abnormal returns.
Finally, once all the steps have been gone through and all the steps have been tackled, the
results should be presented in the convenient form. For example, the results of the tests can be
accompanied by graphs showing the dynamics of average abnormal returns and cumulative
abnormal returns within the event window.
2.1.3. Research Application of The Event Study Methodology
The event study methodology will majorly contribute to fulfilling the first part of the
research goal, i.e. to examining the U.S. banking industry in regard to how the announcement of
M&A deals affects the stock price behavior. In particular, the ESM will make it possible to
answer the following research questions:
Given that the terminology of the ESM has been defined, it is possible to formulate the
research questions as hypotheses. But first, the presence of the announcement effect on the U.S.
bank M&A market should be tested. This can be done by checking if the cumulative abnormal
returns for a specific event window are significantly different from zero. If they indeed are
different, then it serves as an evidence of the presence of the announcement effect on the U.S.
bank M&A market. To check this, a one-sample t-test should be used to test the following null
and alternative hypotheses:
r
H 0 :CAA R ( τ 1 , τ 2 )=0
r
H 1 : CAA R ( τ 1 , τ 2 ) ≠ 0 ,
where CAARr(τ1, τ2) is the cumulative average abnormal return during the event window (τ1, τ2)
either for the acquirer, with lower index r = A, or for the target, with lower index r = T. To
57
ensure that the obtained results are held true, the null hypothesis stated above should be tested
across the event windows of ±3 days, ±5 days, ±7 days and ±11 days. Mathematically, these
events window correspond to the following values of (τ1, τ2): (τ1, τ2) = (-3, +3), (-5, +5), (-7, +7)
and (-11, +11).
If the presence of the announcement effect has been tested positively, it is possible to
proceed to checking the difference between acquiring banks’ and target banks’ abnormal returns.
It can be done by checking the difference between means of two samples consisting of
cumulative abnormal returns for acquiring banks and cumulative abnormal returns for target
banks within a defined event window. The null and the alternative hypotheses for this test are as
follows:
H 0 :CAA R A ( τ 1 , τ 2 )−CAA RT ( τ 1 , τ 2 )=0
H 1 : CAA R A ( τ 1 , τ 2 )−CAA RT ( τ 1 , τ 2 ) ≠ 0 ,
where CAARA(τ1, τ2) and CAART(τ1, τ2) are the cumulative average abnormal returns withing the
event window (τ1, τ2) for the acquiring companies and the target companies respectively.
The null hypothesis can be tested either by the pooled-variance t-test or by the Welch’s t-
test, based on the preliminary run F-test for the equality of two variances. In this case, the null
and the alternative hypotheses for the F-test are as follows:
H 0 :σ 2CA R A
i ( τ ❑1 ,τ 2)
−σ 2CA R T
i ( τ 1 ,τ 2)
=0
2 2
H 1 : σ CA R i
A
( τ❑ 1 ,τ 2 )
−σ CA R T
i (τ 1 ,τ 2 )
≠0,
where CA RiA (τ 1 , τ 2) and CA RTi (τ 1 , τ 2) are the cumulative abnormal returns within the event
2
window (τ1, τ2) for the acquiring banks and the target banks respectively, while σ CA R i
A
( τ ❑1 , τ 2) and
2
σ CA R T
i (τ 1 ,τ 2 ) are population variances of those two variables. Again, to ensure that the obtained
results are held true, the null hypothesis for the mean difference test and hence the null
hypothesis for the variance difference test stated above should be tested across the event
windows of ±3 days, ±5 days, ±7 days and ±11 days. Mathematically, these event windows
correspond to the following values of (τ1, τ2): (τ1, τ2) = (-3, +3), (-5, +5), (-7, +7) and (-11, +11).
After analyzing the obtained abnormal returns comparatively, it is possible to proceed to
analyzing them separately for the acquiring banks and the target banks. One of the questions is
whether the post-announcement abnormal returns are higher than the pre-announcement
abnormal returns. If this is indeed the case, it can be concluded that, on average, there is no
58
explicit evidence of the insider trading taking place on the U.S. bank M&A market. The opposite
situation, however, would signify that the leakage of information had been happening on the
market. To compare the pre-announcement and the post-announcement abnormal returns, the
null and the alternative hypotheses should be formulated as follows:
R R
H 0 :CAA R (−3 ,−1 )−CAA R ( +1 ,+3 )=0
R R
H 1 : CAA R (−3 ,−1 ) −CAA R ( +1 ,+3 ) ≠0
In these hypotheses, the cumulative average abnormal returns are being tested across
different event windows, (τ1, τ2) = (-3, -1) and (τ1, τ2) = (+1, +3). The exact days are chosen
similarly to Shar and Arora (2014), as the most pronounced abnormal returns can usually be
noticed on these days.
It is worth noting that the F-test for the equality of two variances should be run
preliminary to the mean difference test. The null and the alternative hypotheses are as follows:
2 2
H 0 :σ CA R R
i
(−3 ,−1) −σ CA R R
i
( +1 ,+3 ) =0
2 2
H 1 : σ CA R i
R
( −3 ,−1 ) −σ CA R R
i
( +1 ,+3 ) ≠0,
Finally, it can be checked when, on average, the announcement effect gets reflected in the
stock price of the banks. This can be done running the one-sample t-test for the following null
hypothesis against the further following alternative hypothesis:
R
H 0 : AA R τ =0
R
H 1 : AA R τ ≠ 0 ,
where AA Rrτ is the average abnormal return for the event period τ. The event period τ takes
every integer value from the interval [-10; +10], i.e. the abnormal returns are tested on each day
from the 21-day event window. If the null hypothesis for a particular event period τ gets rejected,
then it can be concluded that, on average, the abnormal returns for either the acquirer or the
target are significantly different from zero, i.e. the abnormal returns are pronounced.
2.2. Regression Analysis Methodology

2.2.1. General Description of The Used Approach
After conducting a thorough analysis of the abnormal returns, it is possible to enhance the
results by running a regression on the obtained values of the cumulative abnormal returns, as was
suggested by MacKinlay (1997). The regression analysis of the cumulative abnormal returns can
be conducted either separately for the acquirers and the targets or jointly.
59
In order to run a joint regression, it is necessary to aggregate the returns of both acquirers
and targets. Otherwise, it is possible to face a severe problem of multicollinearity. Therefore, an
aggregation should be done using a portfolio of returns involved in the deal. For example,
DeLong (2003)62 constructs a portfolio of returns for both banks in each deal and tests whether a
merger is value enhancing. As the obtained values of cumulative abnormal returns consists of
abnormal returns for both acquirers and targets, there is no problem of multicollinearity faced by
the author on the stage of the regression analysis.
This thesis, however, will be dealing with two separate models for acquirers and targets.
The abnormal returns of acquiring banks and those of target banks are different in nature, so it
makes sense to divide them into two different groups and to analyze separately. Two regression
models will contribute to the second part of the research goal, i.e. the announcement effect will
be inspected in regard to how it gets influenced by the proposed factors. Through the regression
analysis, the last research question will be answered:
The list of factors that are used as independent variables in regression models is presented
in the list below:
 Deal-related variables:
o Deal value;
o Payment method (dummy);
o Interstate vs. Intrastate (dummy);
 Company-related variables:
o Pre-merger performance;
o Relative size of the target to the acquirer;
 Environment-related variables:
o Federal Funds rate;
o Regulation.
62
DeLong, G. L. (2003) “The Announcement Effects of U.S. versus Non-U.S. Bank Mergers: Do They Differ?”,
The Journal of Financial Research, Vol. 26 No. 4, pp. 487-500.
60
The factors have been divided into different groups to better showcase their different
nature. The fact that the announcement effect is going to be examined through a regression using
factors from three different categories is supposed to make the results of the analysis more
valuable. The inclusion of the majority of these variables is justified by the theoretical materials
presented in section 1.1. However, further justification with citations of academic papers
examining the influence of a particular variable on the announcement effect is needed and
therefore presented below for each of the listed factors.
2.2.2. Regression Variables
2.2.2.1. Deal-related Variables
2.2.2.1.1. Deal Value Variable
Deal value might be an important factor that influences abnormal returns. One
relationship that can be assumed logically is that higher deal value can make the deal seem more
successful in the eyes of investors and thus increase the abnormal returns both for the target and
the acquirer. On the other hand, higher than average deal value can signify a premium paid by
the acquirer, which is often viewed negatively by the acquirer’s investors. There can be many
logically assumed assumptions, so it is worth checking the nature of the relationship between the
deal value and abnormal returns.
For example, Hagendorff, Collins and Keasey (2008)63 included the deal value variable in
their abnormal returns regression model. The authors measure it as the logarithm value of the
M&A transaction. Hagendorff et al. have come up with several models (including and excluding
different factors), but eventually they conclude that in their particular case deal value has not
played an important part in affecting abnormal returns. They are surprised by this finding and try
to explain it through the peculiarity of their sample. The authors did not include any deals with
deal value smaller than $100 million; therefore, at the level this high the potential economies of
scale (subtly associated with deal value by the author) are not that significant and thus do not
contribute to the amount of abnormal returns.
2.2.2.1.2. Payment Method Dummy Variable
The method of payment is generally accepted as a variable that goes hand in hand with
M&A deals. When there is a deal happening between two companies, it is possible to finance the
deal either with cash, or with stock. Also, it is possible to use a mix of both for financing the
deal.
63
Hagendorff, J., Colling, M. and Keasey, K. (2008) “Investor protection and the value effects of bank merger
announcements in Europe and the US”, Journal of Banking and Finance, Vol. 32, pp. 1333-1348.
61
There is quite a difference between these two methods of payment, according to Brealey,
Myers and Allen (2017). First, if the deal is financed by cash, then the deal value is unaffected
by possible stock price fluctuations. Therefore, it is better to account for the post-merger
announcement price change when calculating the deal value. Secondly, method of payment
allows the acquirer to protect itself from possible negative facts associated with the target
business that are not revealed during the due diligence procedure. For example, if the bidder pays
with stock, some future revelations regarding the target’s business will affect not only the
acquirer, but the target itself. However, had the deal been financed with cash, the revelation
would have hurt only the acquirer, while the target would get away with its irresponsible
behavior. Finally, the method of payment makes the difference when the acquirer knows that its
stock is either over- or undervalued. For instance, if the acquirer company’s managers know that
their stock is undervalued, they would expect the price to rise after the merger announcement and
thus would be hesitant to finance the deal with stock, as in this case the price increase would be
enjoyed not only by the acquirer’s shareholders, but also by the target’s shareholders. This
particular case is associated with the problem of asymmetric information, i.e. when both sides of
the deal are in possession of different kinds of information that only they know.
The importance of the method of payment in relation to the value of abnormal returns is
widely proved by different studies accounting for it as a factor. Amihud, Lev and Travlos
(1990)64 view the method of payment problem from two perspectives: asymmetric information
perspective and tax benefits perspectives. Asymmetric information is similar to what Brealey,
Myers and Allen mention in their textbook: if the acquirer’s stock is overvalued, then the
managers prefer to use stock for financing. As for the tax benefits, target shareholders would
rather choose stock over cash, as receiving cash would create an immediate tax liability for them.
Hagendorff, Collins and Keasey (2008) include the method of payment in their model as
well. The value is “1” if the payment is made in cash only and “0” otherwise. They use several
models and mainly focus on how the level of investor protection affects the abnormal returns of
the acquirer, but still the method of payments is included. Their finding is that the returns are
higher if the deal is financed with cash only.
64
Amihud, Y., Lev, B. and Travlos, N. (1990) “Corporate control and the choice of investment financing: The case
of corporate acquisitions”, Journal of Finance, Vol. 45, pp. 603-616.
62
Kyriazopoulos (2016)65, while investigating the wealth effects from bank mergers and
acquisitions in Easter Europe, arrives to the same conclusion, but in regard to the target
companies. After including the cash payment dummy variable into two of his models, he
concludes that the cash only payment positively affects the abnormal returns of target companies
(the result is significant at 1%).
On the other hand, there are some studies that do not find enough evidence of the
influence of the method of payment on abnormal returns (Cornett and De, 1991)66.
Taking into account all of the above, there is no doubt that it is only wise to include the
method of payment variable into the model, as its significance in regard to M&A deals has been
proved by numerous academicians.
2.2.2.1.3. Interstate vs. Intrastate Deal Dummy Variable
As the U.S. is the country whose banks are studies in this research, it is advised to
account for the geographical structure of the country. This is because the state structure plays an
important role in terms of regulation most of the time. The banking environment within a state
might be closed, so that entries of banks from other states through mergers and acquisitions
might not be treated positively by the state regulators. This might play a role of a legal risk for
the whole deal, which might consequently affect the outcome in terms of returns.
The statement about the negative reaction of regulators to interstate deals is proved by
Houston and Ryngaert (1994)67: they claim that the market reactions eventually turns out to be
more positive when the M&A deal involves banks from the same state (i.e. intrastate M&A deal)
rather than from different states (i.e. interstate M&A deal).
Apart from that, DeLong (2003) accounts for the interstate deals in his model as well
while comparing the nature of abnormal returns of U.S. banks with non-U.S. banks.
Based on the statements above, it is suggested to include the dummy variable signifying
the type of the deal in terms of the states involved (“1” if the deal is happening between banks
with headquarters in different states and “0” if the deal is happening between banks with
headquarters in the same states).
65
Kyriazopoulos, G. (2016) “Wealth effects from bank mergers and acquisitions in Eastern Europe”, International
Journal of Economics and Financial Issues, Vol 6, No. 2, pp. 588-595.
66
Cornett, M. and De, S. (1991) “Medium of payment in corporate acquisitions: Evidence from interstate bank
mergers”, Journal of Money, Credit and Banking, Vol. 23, pp. 767-776.
67
Houston, J.F. and Ryngaert, M. (1994) “The overall gains from large bank mergers”, Journal of Banking and
Finance, Vol. 18, pp. 1115-1176.
63
2.2.2.2. Company-related Variables
2.2.2.2.1. Pre-Merger Performance Variable
Pre-merger performance plays an important role in the M&A deals, usually for both
acquirers and targets. It is logical to assume that if the target has been underperforming during
the pre-merger period, it is sending a signal into the environment that it may be a potential target
for a takeover. For example, Palepu (1986) in his study on takeover targets prediction comes to
this very conclusion.
Others might think that it is actually the underperformance of acquirers that makes them
resort to acquiring other banks in order to improve their efficiency (Akhavein, Berger, and
Humphrey (1997)68).
Cybo-Ottone and Murgia (2000)69 find out that actually it is the underperformance of
both sides of the deal that potentially leads to striking the deal. That is, both the target and the
acquirer show signs of underperformance one year before the announcement of the deal.
Thus, given the amount of studies actually incorporating this factor into the models, it is
suggested to include the factor of pre-merger performance into the regression model as well. As
for how it should be measured, it is possible to measure it using the returns of the bank’s stock
during one year period before the announcement minus the returns of the relevant bank index.
2.2.2.2.2. Target MV/Acquirer MV Variable
The relational size of the acquiring company in comparison with the acquired company is
likely to play a role in affecting the size of abnormal returns. For example, if both sides of the
deal are more or less equal in the market values, then the market might treat this merger as a
huge win for the acquirer. On the other hand, the investors might rightfully assume that such a
“merger-of-equals” would eventually draw the attention of the regulators, whose actions might
hurt the deal in the future. Obviously, there are different possibilities associated with the effect of
this variable on the size of abnormal returns; therefore, investigating what the relationship is
should benefit the interested parties.
Several studies have already used this variable in their respective regression models. For
example, James and Wier (1987)70 investigate the relative size of the target to the acquirer in
68
Akhavein, J., Berger, A. and Humphrey, D. (1997) “The effect of megamergers on efficiency and prices: evidence
from a bank profit function”, Review of Industrial Organization, Vol. 12, pp. 95-139.
69
Cybo-Ottone, A. and Murgia, M. (2000) “Mergers and shareholder wealth in European banking”, Journal of
Banking and Finance, Vol. 24, pp. 831-859.
70
James, C.M. and Wier, P. (1987) “Returns to acquirers and competition in the acquisition market: The case of
banking”, Journal of Political Economy, Vol. 95, pp. 355-370.
64
their model. They found out that the bigger the target relatively to its acquirer, the higher the
abnormal returns for the acquirer. Given that this statement holds true, it is advisable for the
acquiring banks to aim for bigger targets if they want to maximize their own shareholders’
wealth.
According to DeLong (2003), the relative size of the target to the acquirer plays an
important role, too. DeLong investigates the relationship of the relative target size to three types
of abnormal returns: combined, acquirer and target. There is a slightly positive relationship
between the size and the combined returns, a slightly negative relationship between the size and
the acquirer returns and rather negative relationship between the size and the target returns. The
latter fact is probably due to the fact that the bigger the acquired company, the more its investors
are upset because of its acquisition.
Thus, it is evident that the variable measuring the relative size of the target has already
proved to have importance when determining the factors affecting the abnormal returns. Because
of this, it is only logical to include it into the regression model and to check importance on a
dataset of recent mergers.
2.2.2.3. Environment-Related Variables
2.2.2.3.1. Federal Funds Rate
According to Krugman (2006)71, Federal Funds Rate is the interest rate that is used by
banks and other depository institutions for lending money to other institutions as well as for
borrowing money from other institutions, both on an overnight and on an uncollaterized basis.
The Federal Funds rate is set by the Federal Open Market Committee (FOMC) on their regular
meetings. The target Federal Funds Rate is set as a benchmark which banks should take into
account while conducting their borrowing and lending operations. However, being just a
benchmark is not enough for the Federal Funds Rate to serve as a short-term policy instrument
for the FOMC. The actual Rate is being moved to the target value by the Open Market Desk of
the Federal Reserve Bank of New York. There, Fed’s bond traders conduct the open-market
operations to move the FFR to the target value.
A good example of how the Federal Funds Rate can be used as a policy instrument is the
Quantitative Easing (QE) monetary policy employed by the U.S. Federal Reserve System under
the lead of Ben Bernanke, a prominent U.S. economist. Mankiw (2016) 72 describes QE as a
71
Krugman, P., and Wells, R. 2006. Macroeconomics. New York, NY: Worth Publishers
72
Mankiw, N. Gregory. 2016. Macroeconomics. 9th ed. New York, NY: Worth Publishers
65
policy of buying long-term government bonds to keep their prices up and long-term interest rates
down. These open-market operations expand the Fed’s balance sheet, increase the money supply,
and thus move the Federal Funds Rate to its target value set by the FOMC. The Fed used the
policy to fight off the consequences of the Great Recession for the U.S. economy 73. Because of
the QE policy, the Fed managed to maintain the interest rates at close to zero levels during 2008-
2016. Now, the Federal Reserve has cut the interest rates to zero once again – this time to fend
off the financial crisis imposed by the coronavirus outbreak 74. With the intention of doing
anything possible to support the U.S. economy, the Fed vowed to purchase government bonds in
unlimited amounts to maintain high levels of money supply and thus keep the interest rates at
rock-bottom levels75.
Mankiw (2016) claims that the larger money supply achieved by the QE policy leads to
higher investment made by the firms, to the higher output from the firms’ operations and to
lower unemployment. Also, individual consumers benefit from the policy through lower debt and
mortgage interest rates. All this leads to the higher economic activity, which eventually
positively affects the stock prices of the firms in the market. Given high stock prices, it is easier
for the firms to merge with or acquire other firms when the M&A deals are financed using stock
as a method of payment.
The same relationship between the Federal Funds Rate and the M&A activity can be
assumed because of the low interest rates. Apart from stock, banks (or firms from other
industries) can use borrowed cash for financing potential M&A deals. If the Federal Funds Rate
as at its low levels, it is only logical to try and strike deals during this period when the cost of
money is low. A positive relationship between the Federal Funds Rate and M&A activity has
been observed by Boetticher (2015)76, Choi and Jeon (2010)77.
All in all, given that the value of the Federal Funds Rate can affect the M&A activity on
the U.S. market, it is worth checking if the Rate can affect the abnormal returns the companies
73
The Financial Times, 2008. Fed slashes rates to near zero, December 17. Retrieved from:
https://www.ft.com/content/96a7c1d2-cba0-11dd-ba02-000077b07658
74
The Financial Times. 2020. Fed cuts U.S. interest rates to zero as part of sweeping crisis measures, March 16.
Retrieved from: https://www.ft.com/content/a9a28bc0-66fb-11ea-a3c9-1fe6fedcca75
75
The Wall Street Journal. 2020. Fed Unveils Major Expansion of Market Intervention, March 23. Retrieved from:
https://www.wsj.com/articles/federal-reserve-announces-major-expansion-of-market-supports-11584964844
76
Boetticher, Sebastian v. 2015. The Federal Reserve’s Impact on the U.S. M&A Market: An Empirical
Examination. Outstanding Senior Project, Orfalea College of Business, California Polytechnic State University.
77
Choi, S.H., and Jeon, B.N. 2010. The Impact of The Macroeconomic Environment on Merger Activity: Evidence
from The U.S. Time-Series Data. Applied Financial Economics 21 (4): 233-249.
66
(banks, in particular) are earning due to the announcement effect. In order to check this, the
variable of the abnormal return has been chosen to be added to the regression model. The
historical values of the Federal Funds Rate has been collected for the period 2010-2019. For each
deal in the sample, the announcement date has been matched with the corresponding Rate.
2.2.2.3.2. Regulation Dummy Variable
Third variable I am planning to include in the regression model is the strictness of
regulation. Throughout the academic studies, it is widely known that strictness of regulation
affects the number of M&A deals. In particular, it is accepted that Garn-St. Germain Depository
Institutions Act of 1982 gave the start to the U.S. banking M&A wave back in the 1980s
(Harford, 2005)78. Apart from that, Gramm-Leach-Biley Act (GLBA) of 1999 provided a further
regulatory relief for banks, repealing the effect of Glass-Steagall Act of 1933 and removing
restrictions on the number of banking spheres one bank can engage simultaneously in. Then
there was the Dodd-Frank act, putting regulatory pressure on the banks and stopping M&A
activity for a while. Finally, with the election of Donald Trump as the President of the United
States of America, the Crapo Bill was enacted in 2018, thus repealing the Dodd-Frank and
opening doors for further M&A activity for banks.
It can be concluded that the regulatory regime indeed has a huge influence on the M&A
activity. But then again, does it have influence on the abnormal returns? Is it that banks earn
more from M&A deals during the fruitful period of eased regulations, or vice versa? This is the
question I am planning to answer by including the regulation variable into the regression model.
As my sample includes two periods differing in the strictness of regulation (2010-2017 and
2018-2019), I am planning to control this factor through a dummy variable indicating the
occurrence of the deal either in the strict or soft regulatory period.
2.2.3. Regression Models
Taking into account all the variables mentioned in the previous section, the final
regression model for the acquiring companies will look as follows:
A
CA Ri ( τ 1 , τ 2 ) =β 0+ β1∗LOGVALUE+ β 2∗STOCK + β3∗INTER+ β 4∗PERFA + β 5∗¿ RELSIZE+ β 6∗¿ RATE+ β 7∗R
The regression model for the target companies looks in a similar way and can be seen in
the formulate below:
A
CA Ri ( τ 1 , τ 2 ) =β 0+ β1∗LOGVALUE+ β 2∗STOCK + β3∗INTER+ β 4∗PERFT + β 5∗¿ RELSIZE + β 6∗¿ RATE+ β 7∗R
78
Harford, J. (2005) “What drives merger waves?”, Journal of Financial Economics, Vol. 77, pp. 529-560.
67
The variables in the model above are in accordance with the previously listed factors and
indicate the following:
o LOGVALUE: the natural logarithm of the value of the deal in which the bank in
the sample is involved;
o STOCK: dummy variable indicating if the deal is financed only by stock;
o INTER: dummy variable indicating if the deal involving the bank in the sample is
happening between two banks with headquarters in different states (1 = interstate
merger, 0 = intrastate merger).
o PERFA: indicator of the pre-merger announcement performance of the acquiring
bank in the sample measured as the bank’s return on stock for the period from day
-260 to day -10 later decreased by the return of the Dow Jones U.S. Bank Index
(DJUSBK) for the same period;
o PERFT: indicator of the pre-merger announcement performance of the target bank
in the sample measured as the bank’s return on stock for the period from day -260
to day -10 later decreased by the return of the Dow Jones U.S. Bank Index
o RELSIZE: target’s market capitalization one month before the announcement date
divided by the market capitalization of the acquirer one month before the
announcement date;
o RATE: Federal Funds Rate on the date of the deal announcement;
o REG: the regulatory regime during which the deal involving the bank in the
sample is taking place (1 = The Crapo Bill of 2018, 0 = Dodd-Frank of 2010).
2.2.4. Testing the Regression Model
Creating the models is just the first step that is implied by the regression analysis. The
second step is to analyze the model in order to conclude how valid the results produced by the
model are. To address this part of the regression analysis, below the following concepts are
presented: the coefficient of determination R2 (R-squared), the overall significance of the model,
the significant of the factors included in the model and the problem of multicollinearity.
68
The coefficient of determination allows to measure how much of the variance in the
dependent variable is explained by the set of independent variables that have been included in
the regression model (Berenson et al., 2019)79. The R2 can be calculated using the following
formula:
2 SSR
R= ,
SST
where SSR is the regression sum of squares and SST is the total sum of squares. To provide a
better understanding of the underlying meaning behind the R 2, it is needed to explain what the
SSR and SST values mean. These values, as well as the coefficient of determination, are used to
measure the goodness-of-fit of models that are constructed using the Ordinary-Least-Squares
(OLS) method. The total sum of squares (SST) measures the variance of the dependent variable
around its mean. These variances consist of two parts: the regression, or explained, sum of
squares (SSR) and the error sum of squares (SSE). The SSR measures the variation that is due to
the relationship between the dependent variable and the independent variables included in the
model, while the SSE measures the variation in the dependent variable that is explained by
something else (likely some other variables) that has not been accounted for in the model. Thus,
dividing the SSR value by the SST value makes it possible to get the percentage value of the
variance of the dependent variable that the current specification of the model successfully
manages to explain.
After measuring the goodness-of-fit of the model, the next step is to check if the model is
statistically significant. The following null hypothesis should be tested against the further
following alternative hypothesis:
H 0 : β 1=…=β k =0
H 1 : At least one β j ≠ 0
The null hypothesis postulated that there is no linear relationship between the dependent
variable and the independent variables included in the model, while the alternative hypothesis
indicated the presence of such a relationship.
The test can be conducted using the overall F-test for statistical significance (Berenson,
2019). The F-statistic is calculated using the following formula:
79
Berenson, M.L., Levine, D.M., Szabat, K.A., Watson, J., Jayne, N., O’Brien, M. (2019) Basic Business Statistics:
Concepts and Applications (5th edition). Upper Saddle River: Pearson
69
MSR
F= ,
MSE
where MSR is the regression mean square and MSE is the error mean square. The calculated F-
statistic follows an F distribution with k and k – n – 1 degrees of freedom, where k is the number
of explanatory variables included in the model and n is the number of observations in the dataset.
Then, it is required to check each of the independent variables included in the model
separately for statistical significance. It can be done by testing the following null hypothesis
against the further following alternative hypothesis:
H 0 : β j=0
H1: β j≠ 0 ,
where βj is the slope coefficient of the dependent variable j. In case the null hypothesis gets
rejected, it can be concluded that the tested independent variable has a significant effect on the
dependent variable.
The testing procedure for each of the independent variables can be done using the t-test.
The t-statistic is calculated as follows:
b j−β j
t= ,
Sb j
where bj is the slope of variable j with the dependent variable, given that all other independent
variables are held constant; βj is the hypothesized value of the population slope of variable j with
the dependent variable, given that all other independent variables are held constant; Sb is the j
standard error of the regression coefficient bj. The t-statistic itself follows the Student’s t
distribution with n – k – 1 degrees of freedom.
The next problem concerning the constructed model is the multicollinearity. According to
Hill et al. (2018)80, if the independent variables are observed to be moving together in systematic
ways, such a problem can be called collinearity, or multicollinearity. The problem of
multicollinearity poses several threats that make it hard to use the model for any inferences. The
consequences of multicollinearity include the following:
 Excessively high standard errors of the regression variables;
 Insignificant difference from zero of regression parameters and hence the insignificance
of the regression factors;
80
Hill, R.C., Griffiths, W.E. & Lim, G.C. 2018. Principles of Econometrics. Hoboken, NJ: John Wiley & Sons
70
 Impossibility of telling apart the effects of the collinear variables on the dependent
variable.
There are two ways to check for the presence of the multicollinearity between the
independent variables. Before the model has been estimated, it is useful to construct a correlation
matrix that includes the coefficients of pair-wise correlation for each pair of the variables from
the model. If any pair of the independent variables is observed to have a high enough absolute
value coefficient of correlation, then it signifies the presence of the multicollinearity in the
model.
The second way to detect the multicollinearity is through the calculation of variance
inflations factors, or VIFs (Wooldridge, 2020) 81. There is a whole complex step-by-step
procedure to calculate VIFs, but this matter is out of this paper’s scope. The VIF is calculated for
each independent variable in the regression model. There are different rules of thumb on the
benchmark VIF values exceeding of which should lead to the conclusion that the
multicollinearity is present. Sheather (2009) 82 state that there is evidence of multicollinearity if
VIF > 5 while Kurtner, Nachtsheim and Neter (2004)83 use the VIF > 10 rule.
2.3. Summary
Chapter 2 has been concerned with outlining the methodologies that are used in this
research to examine the announcement effect of the U.S. bank mergers. In particular, the event
study methodology (ESM) and the regression analysis have been described. The former is
concerned with examining the nature of the announcement effect on the U.S. bank merger
market, while the latter is concerned the ex-ante factors influencing the announcement effect.
The event study methodology has been described with the help of prominent paper on
this topic by MacKinlay (1997). All the steps of the ESM have been thoroughly described,
including but not limited to the calculation of abnormal returns, the choice of the normal
performance model, the aggregation of the abnormal returns. Later on, the hypotheses have been
formulated in accordance with the research questions stated in section 1.4 of Chapter 1. All the
possible parameters of the event study methodology (the normal performance model, the
examined event windows, aggregation) have been chosen and justified.
81
Wooldridge, J.M. 2018. Introductory Econometrics: A Modern Approach. Boston, MA: Cengage
82
Sheather, S. 2009. A Modern Approach to Regression with R. New York, NY: Springer
83
Kurtner, M.H., Nachtsheim, C.J. and Neter, J. 2004. Applied Linear Regression Models (4th ed.). New York, NY:
McGraw-Hill Irwin
71
The second part of Chapter 2 is devoted to the methodology of the regression analysis. It
has been suggested to estimate two different regression models: one for acquiring banks and
another for target banks. After a thorough literature review on the topic, a set of factors has been
chosen to be included in the proposed regression models. To tackle the problem of identifying
impacting factors, they have been divided into three groups, each group covering a specific deal-
related field. Once the factors have been chosen, two separate models have been outlined for
acquirers and targets. Finally, the instruments that are to be used in the research for checking the
validity of the regression model have been described with support of the academic sources. The
instruments include test that are used for examining different problems in the model.
Chapter 1 has been concerned with laying the foundation for the research, while Chapter
2 concerns the instruments, the methodologies that are used for conducting the research. Next
chapter, Chapter 3, will present the results of the conducted analysis: both the event study and
the regression analysis. Obtained theoretical results will be accompanied by managerial
implications stemming from the results.
72
CHAPTER 3. RESULTS OF THE EMPIRICAL ANALYSIS
3.1. Data Sample
3.1.1. Sample Collection Process
To obtain the data required for the research, Thomson Reuters Eikon database was used.
In particular, Thomson Reuters M&A Database was used to obtain the data on the merger deals
and Thomson Reuters Datastream was used to obtain the historical stock price data for the banks
in the sample.
The initial sample included 3,575 deals: M&A deals between two banks with the
announcement data any time between 01.01.2010 and 31.12.2019. Then, several other
restrictions followed:
1. The status of the deals should be “Completed”, as it does not help the cause to include
cancelled, intended, rumoured, and other deals into the sample. This restriction decreased
the number of deals to 2,457;
2. Both banks should be public, i.e. their stock should be trading on the market. Otherwise,
it will not be possible to obtain the stock price data necessary for the event study
methodology. This restriction drastically affected the number of deals, their resulting
number being 484;
3. In order to make sure that it is an M&A deal and not an acquisition that has taken place,
the restriction on the form of the transaction was put. After that, there were 366 deals
identified as “Merger”.
Thus, the size of the final sample exported from the M&A database was 366 deals.
However, later, the sample size decreased even more.
To make sure that only the most market-affecting deals are analyzed, a restriction on the
deal value was put. According to the Hart-Scott-Rodino Act (see section 1.1.5), if a deal crosses
a certain value threshold, then it is obligatory to notify the Federal Trade Commission and the
Department of Justice about the upcoming deal. This led to reducing the sample size to 182
deals, including only deals that were reported to the regulators.
Once this sample was obtained, each bank’s ticker symbol had to be obtained, along with
the stock exchange where a particular bank’s stock was or is trading. This helped to ensure the
precision of historical stock price collection. The gathering of information on banks’ tickers was
73
done through finding press releases about the deals’ announcement on the Internet. Then, tickers
were checked for their legitimacy through websites with stock data, including the New York
Stock Exchange (NYSE) and the National Association of Securities Dealers Automated
Quotation (NASDAQ) websites. It is important to note that some banks were trading neither on
NYSE nor on NASDAQ, but on over-the-counter (OTC) markets, which later turned out to be an
impediment.
Right after the ticker symbol collection process was done, historical stock prices of the
respective companies were to be obtained through Thomson Reuters Datastream. In the process,
it became apparent that it was not possible to collect a required dataset for the banks trading on
the OTC markets. It turned out that trading on the OTC markets happens irregularly. An OTC
stock can be traded as seldom as 50 days in a year, which is less than 3 full months in terms of
working weeks. This amount of observations is not enough for the event study methodology, so
another 47 deals had to be removed from the sample, leaving the sample with 135 deals in it.
When all the historical stock prices were downloaded, the data were doublechecked for
mistakes and sufficiency. It turned out that 11 deals had on or more empty observations within
the event window of 21 days, so those deals had to be removed as well. Thus, the final sample
consists of 124 deals.
For each of the 124 deals, historical prices have been obtained for 141 trading days. This
includes 21 days for the biggest event window of 21 days studied in this research, as well as 120
days for the pre-estimation window, i.e. for estimating normal performance.
Moreover, Dow Jones United States Bank Index (DJUSBK) values have been obtained
for the period starting from January, 1, 2009 and ending on December, 31, 2019. All index
values have been matched with banks’ stock price on respective days. These data, i.e. stock price
values and DJUSBK values, will later be used simultaneously for constructing the market model,
using which normal performance of each bank will be predicted within the event window.
3.1.2. Sample Characteristics
This section is devoted to providing a better understanding of the nature of the studied
sample. It is useful to discover different characteristics of the sample, including such
characteristics as deal value, distribution of deal roles between banks, directions of acquisitions.
As for the deal value, the main metrics are presented in the table below:
Table 1. Deal value characteristics
74
Max $28,281.59 mln
Mean $859.48 mln
Q3 $724.48 mln
Median $325.13 mln
Q1 $167.96 mln
Min $87.23 mln
In the table above, the maximum value of more than $28 bn. belongs to the recently
consummated M&A deal between SunTrust and BB&T, which led to the creation of Truist Bank.
The deal with the lowest value in the sample was announced on October, 26, 2015: German
American Bancorp, Inc. announced its intention to merge with River Valley Bancorp paying
$87.23 mln. in the process.
The mean deal value is $859 mln., while the median deal value is $724 mln. Mean value
is greater than median value, which means that the distribution of deal values is right-skewed.
This is mostly due to the enormously large deal between BB&T and SunTrust.
As has already been mentioned, the sample consists of 124 deals. In these 124 deals, a
total of 198 unique banks have participated. Out of these 198 banks, 113 banks were only targets,
74 banks were only acquirers and 11 banks initially were acquirers, but later became targets (fig.
3.1).
Fig. 3.1. Distribution of deal roles in the sample

There is a total of 85 banks that have ever participated in a deal being an acquirer. Out of
these 85 banks, 25 banks acquired more than 1 bank: 16 banks acquired 2 banks, 4 banks
acquired 3 other banks, and 5 banks acquired 4 other banks (fig. 3.2). If a bank often participates
75
in bank M&A deals, it might be that this bank uses merger as a strategy to expand on the market.
This is especially true for those banks that have acquired 3 or 4 banks within the 10-year period.
Fig. 3.2. Acquirers sorted by acquisitions

There is also this factor signifying if the deal is happening between banks with
headquarters in different states. Out of 124 deals, 67 deals are considered interstate, while other
57 have happened within the same state (fig. 3.3).
Fig. 3.3. Distribution of interstate/intrastate mergers in the sample

The “hottest” states for intrastate deals are California, New Jersey and Virginia: 7
intrastate deals have taken place in each of them. As for interstate deals, there is much more
diversity in the “direction” of deals. Two directions can be emphasized, however: it is South
Carolina bank purchasing a North Carolina bank and Connecticut bank purchasing a
Massachusetts bank. This can probably be explained by their close location to each other: South
Carolina is a neighbour state with North Carolina; the same applies to Connecticut and
Massachusetts. Hence tight economic relationship.
76
As for the general information regarding the headquarters of deal participants, the results
are quite diverse as well. Most often, acquirers were headquartered in Pennsylvania and New
Jersey, two north-eastern states: 9 times acquirers were located in each of these states. On the
other hand, Pennsylvania, North Carolina, and Virginia were most popular in getting their banks
acquired: a target bank was in each of these states 10 times.
3.2. Event Study Results

3.2.1. Introduction to The Event Study
This section is devoted to the event study procedure. This section’s aim is to find answers
for the following research questions:
In accordance with the research methodology, the event study procedure has been carried
out using the data from the collected sample. All the calculations and tests in this section have
been carried out using Stata 15 statistical software. For each bank in every deal from the sample
a normal performance model specified as a market model has been constructed. To construct the
model, the historical stock returns of the 120-day period were used as a dependent variable,
while Dow Jones U.S. Bank Index (DJUSBK) returns on the corresponding days were used as an
independent variable. The model was used to predict returns within the 21-day event window.
Once the predicted values have been obtained, they were deducted from actual returns
within the event window. As a result, 21-day abnormal returns were calculated for each bank in
each of the 124 deals. That is, 5,208 values of abnormal returns have been obtained in total. The
obtained values have been divided into two groups: acquirer abnormal returns and target
abnormal returns. The procedure of aggregation across events has been done for each τ from the
event window (τ1, τ2) = (-10, +10), resulting in 42 values of average abnormal returns (AAR τ)
having been obtained, including 21 values for bidders and 21 values for targets. The procedure of
aggregation through time has been done as well for each pair of (τ1, τ2) from the following list:
(τ1, τ2) = (-3, +3), (-5, +5), (-7, +7) and (-10, +10). It resulted in 992 values of cumulative
abnormal returns (CARi(τ1, τ2)) having been obtained, including 496 values for bidders and 496
values for targets. Finally, the procedure of aggregation both across events and through time has
77
been done for the same list of event windows. It resulted in 8 values of cumulative average
abnormal returns (CAAR(τ1, τ2)) having been obtained, including 4 values for bidders and 4
values for targets.
As for the event study procedure, first and foremost it is imperative to ensure that the
further analysis is relevant. To do this, the presence of the announcement effect has been
checked for both acquirers and targets. The results are presented in subsection 3.2.2.
After that, the data have been analyzed comparatively, i.e. acquirers’ abnormal returns
have been compared to targets’ abnormal returns. The results of the comparative analysis are
presented in subsection 3.2.3.
Finally, the data have been analyzed separately for acquirers and targets. The relationship
between the pre-announcement and the post-announcement returns has been identified, as well as
the question of when the announcement effect gets reflected in stock prices has been answered.
The results for acquiring banks and target banks are provided in subsections 3.2.4. and 3.2.5
respectively.
3.2.2. Presence of The Announcement Effect on The U.S. Bank M&A Market
Any study of the announcement effect should start with checking if there is a
considerable announcement effect being reflected in the measured abnormal returns. If there is
no announcement effect, then it undermines the whole purpose of further analysis. On the other
hand, if the there is an announcement effect being present, then it gives a solid ground for going
into details with the analysis.
Presence of the announcement effect should be checked separately for acquirers and
targets, as it is logical to assume that the effect should be different for these two categories of
banks. The testing procedure is quite simple: it should be concluded if, on average, cumulative
abnormal returns for acquiring banks and for target banks are significantly different from zero.
To do this, a one-sample t-test should be used to test the stated hypotheses.
In order to check the presence of the announcement effect for acquiring banks, the
following null hypothesis should be tested against the further following alternative hypothesis:
A
H 0 :CAA R ( τ 1 , τ 2 )=0
A
H 1 : CAA R ( τ 1 , τ 2 ) ≠ 0 ,
where the event window (τ1, τ2) consequently takes each of the values from the following list: (τ1,
τ2) = (-3, +3), (-5, +5), (-7, +7) and (-11, +11). Testing the announcement effect across different
78
event windows makes it possible to enhance the results by making it more definite. Thus, the
results of the one-sample t-test of acquiring banks’ cumulative abnormal returns are presented in
the table below (table 2):
Table 2. Results of the acquirer CARi(τ1, τ2) significance tests
Cumulative Average t-statistic P-value
Abnormal Return
( CAA R A ( τ 1 , τ 2 ) )
±3 days -1.93%*** -4.6374 0.0000
±5 days -1.86%*** -4.2102 0.0000
±7 days -2.15%*** -4.3029 0.0000
±10 days -2.28%*** -3.8877 0.0002
*, **, *** denote the statistical significance at 10%, 5% and 1% level respectively
As can be observed, the results have proven to be statistically significant at 1% level for
every event window. Statistically speaking, the null hypothesis is rejected, which means that, on
average, the cumulative abnormal returns for acquiring banks are significantly different from
zero. Thus, the announcement effect indeed affects the acquiring banks in the U.S., as
statistically significant negative abnormal returns are generated as a result of negative market
reaction to the announcement.
In order to check the presence of the announcement effect for target banks, the following
null hypothesis should be tested against the further following alternative hypothesis:
T
H 0 :CAA R ( τ 1 , τ 2 )=0
T
H 1 : CAA R ( τ 1 , τ 2 ) ≠ 0 ,
τ2) = (-3, +3), (-5, +5), (-7, +7) and (-11, +11). Testing the announcement effect across different
event windows makes it possible to enhance the results by making them more definite. Thus, the
results of the one-sample t-test of target banks’ cumulative abnormal returns are presented in the
table below (table 3):
Table 3. Results of the target CARi(τ1, τ2) significance tests
Cumulative Average t-statistic P-value
Abnormal Return
79
( CAA RT ( τ 1 , τ 2 ) )
±3 days 16.87%*** 10.1386 0.0000
±5 days 16.65%*** 9.4716 0.0000
±7 days 16.43%*** 9.2722 0.0000
±11 days 16.71%*** 9.2700 0.0000
As can be inferred from the results of the t-test presented in the table above, on average,
cumulative abnormal returns are statistically significant at 1% level of confidence for every
event window. That means that the announcement effect is indeed present for target banks in the
United States. It affects target banks positively, as the cumulative average abnormal return
observed across 124 deals is significantly positive.
Thus, after testing the abnormal returns associated with the merger deal announcements
of U.S. banks for statistical significance, it can concluded that the announcement effect is present
on the U.S. bank M&A market. In other words, there is a specific reaction of the market to the
deal announcement that gets reflected in the stock prices of involved banks. On average, as a
result of the announcement, bidding banks’ stock price falls by around 2%, while the target
banks’ stocks enjoy a positive return of 16-17%.
3.2.3. Comparison of Acquirers’ And Targets’ Abnormal Returns
Now that the announcement effect has been proved to be present in the abnormal returns
of both acquirers and targets, it is possible to proceed with further analysis. The next logical step
is to conduct a comparative analysis of abnormal returns of acquirers and targets. In particular,
the question is if there is a statistically significant difference in abnormal returns earned by
acquirers and abnormal returns earned by targets as a result of the merger deal announcement.
This question can be answered by running a two-sample mean comparison test on
acquirers’ cumulative abnormal returns and targets’ cumulative abnormal returns. But first, it is
needed to check if these two samples have different variances, as this will affect the specific two-
sample mean comparison test that should be used. The null hypothesis and the alternative
hypothesis are formulated below:
H 0 :σ 2CA R A
i ( τ 1 , τ 2)
−σ 2CA R T
i ( τ 1 , τ 2)
=0
2 2
H 1 : σ CA R i
A
( τ 1 ,τ 2)
−σ CA R T
i ( τ 1 ,τ 2)
≠0
80
τ2) = (-3, +3), (-5, +5), (-7, +7) and (-10, +10). Testing across different event windows makes it
possible to make a definite conclusion based on the obtained results. The null hypothesis should
be tested against the alternative hypothesis using the F-test for the difference between variances
in two samples. The results of the F-test are presented in the table below (table 4):
Table 4. Results of the variance comparison test
SCA R A
(τ 1 ,τ 2 )
SCA R T
(τ 1 , τ 2) F-statistic P-value
i i
±3 days 0.0463953 0.1852586 0.0627 0.0000

±5 days 0.0490772 0.1957068 0.0629 0.0000
±7 days 0.0555416 0.1973356 0.0792 0.0000
±11 days 0.0652918 0.2006997 0.1058 0.0000
Based on the p-value decision rule, it can be concluded that there is a statistically
significant difference at 1% level between the variances of CA RiA (τ 1 , τ 2) and CA RTi (τ 1 , τ 2) for
every examined event window. Therefore, Welch’s t-test for comparing means of two samples
with unequal variances should be used to test the difference between cumulative abnormal
returns of acquiring banks and those of target banks. In order to find if there is a statistically
significant difference, the following null hypothesis should be tested against the further
following alternative hypothesis:
A T
H 0 :CAA R ( τ 1 , τ 2 )−CAA R ( τ 1 , τ 2 )=0
A T
H a :CAA R ( τ 1 , τ 2 )−CAA R (τ 1 , τ 2 )≠ 0 ,
τ2) = (-3, +3), (-5, +5), (-7, +7) and (-11, +11). Testing across different event windows makes it
possible to make a definite conclusion based on the obtained results. The results of the Welch’s
t-test are presented in the table below (table 5):
Table 5. Results of the mean comparison tests
A T
CAA R (τ 1 , τ 2) CAA R ( τ 1 , τ 2) t-statistic Two-sided Left-sided
critical value critical value
(α = 0.05) (α = 0.05)
±3 days -1.93% 16.87% -10.9615 1,9773 -1,6560
±5 days -1.86% 16.65% -10.2113 1,9773 -1,6560
81
±7 days -2.15% 16.43% -10.0912 1,9768 -1,6557
±11 days -2.28% 16.71% -10.0180 1,9761 -1,6552
According to the two-sided critical value of t from the table above, the calculated t-
stastics fall into the rejection region. Therefore, the null hypothesis is rejected in each of the 4
tests. That means that there is a statistically significant difference between cumulative abnormal
returns of acquiring banks and those of target banks.
The exact relationship between these two variables can be obtained by testing a one-sided
alternative hypothesis. Based on the sample mean values from the table above, it seems sensible
to test the following null hypothesis against the further following alternative hypothesis:
A T
H 0 :CAA R ( τ 1 , τ 2 )−CAA R ( τ 1 , τ 2 )=0
A T
H a :CAA R ( τ 1 , τ 2 )−CAA R ( τ 1 , τ 2 ) <0
According to the left-sided critical values of t from the table above, the calculated t-
statistic falls into the rejection region. Therefore, the null hypothesis is rejected in each of the 4
tests. That is, it can be definitely concluded that, on average, the cumulative abnormal returns of
target banks are significantly greater than the cumulative abnormal returns of acquiring banks.
The obtained result can easily be observed on the graph below (fig. 3.4):
Fig. 3.4. The CAAR(-10, +10) values for acquiring and target banks
The graph above is featuring cumulative average abnormal returns within the event
window (τ1, τ2) = (-10, +10). No considerable returns can be seen for both bidder and targets
until day 0; the cumulative average abnormal returns of both sides of the deal are fluctuating
around 0%. However, during the event window (τ1, τ2) = (0, +2) things drastically change as a
result of the announcement effect. Acquirers yield a negative return, while targets enjoy a
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significant positive return. Later, during the period of (τ1, τ2) = (+3, +10) the cumulative average
abnormal returns of acquirers and targets do not change that much: they fluctuate around 17%
and -2% respectively.
3.2.4. Event Study of Acquirers’ Abnormal Returns
Now that the comparative analysis between the acquiring banks’ abnormal returns and
the target banks’ abnormal returns has been conducted, it is possible to proceed with the detailed
analysis of each side of the merger deals separately, starting with the acquiring banks.
First, it needs to be checked if there is a statistically significant difference between the
cumulative abnormal returns of acquiring banks during the pre-announcement period and those
during the post-announcement period. To test this, Shah and Arora (2014) suggest to use the
cumulative abnormal returns between event windows of (τ1, τ2) = (-3, -1) and (τ1, τ2) = (+1, +3),
as the abnormal returns (if any) are usually the most pronounced during these two event
windows. This can be done using a two-sample mean comparison test. But first, it is needed to
check if these two samples have different variances, as this will affect the specific two-sample
mean comparison test that should be used. For the variance difference test, the null hypothesis
and the alternative hypothesis are formulated below:
2 2
H 0 :σ CA R A
i
( −3 ,−1 ) −σ CA R i
A
( +1 ,+3 ) =0
2 2
H 1 : σ CA R i
A
( −3 ,−1) −σ CA R i
A
( +1 ,+3) ≠0
The null hypothesis should be tested against the alternative hypothesis using the F-test for
the difference between variances in two samples. The results of the F-test are presented in the
Table 6. Results of the variance comparison test
SCA R A
i
( −3 ,−1)
SCA R A
i
( +1 ,+3 ) F-statistic P-value
Standard Deviation
0.0196 0.0360 0.2946 0.0000
Comparison Test
significant difference at 1% level between the variances of CA RiA (−3 ,−1) and CA RTi (+1 ,+ 3) .
Therefore, Welch’s t-test for comparing means of two samples with unequal variances should be
used to compare the cumulative abnormal returns of acquiring banks during the pre-
announcement period and during the post-announcement period. In order to find out if there is a
83
difference, the following null hypothesis should be tested against the further following
alternative hypothesis:
A A
H 0 :CAA R (−3 ,−1 )−CAA R (+1 ,+3 )=0
A A
H a :CAA R (−3 ,−1 ) −CAA R (+1 ,+3)≠ 0
The results of the Welch’s t-test are presented in the table below (table 7):
Table 7. Results of the mean comparison test
Right-sided
Two-sided
A A
critical
CAA R (−3 ,−1) CAA R (+1 ,+3) t-statistic critical value
value
(α=0.05)
(α=0.05)
Mean
Comparison 0.0003826 -0.0029715 0.9112 1.9726 1.6530
Test
statistic falls into the non-rejection region. Therefore, the null hypothesis cannot be rejected.
That means that as far as acquiring banks are concerned, there is no statistically significant
difference between the pre-announcement cumulative abnormal returns and the post-
announcement cumulative abnormal returns.
A A
H 0 :CAA R (−3 ,−1 )−CAA R (+1 ,+3 )=0
A A
H 0 :CAA R (−3 ,−1 )−CAA R (+1 ,+3 )> 0
Again, the calculated t-statistic lies in the non-rejection region. Therefore, the null
hypothesis cannot be rejected. Thus, based on the results of both tests, as far as acquiring banks
are concerned, there is no statistically significant difference between the pre-announcement
cumulative abnormal returns and the post-announcement cumulative abnormal returns.
It is also necessary to check if the cumulative abnormal returns during both the pre-
announcement period and the post-announcement period are statistically significant on their own.
84
This can be checked using the one-sample t-test. For the pre-announcement cumulative abnormal
returns, the null hypothesis and the alternative hypothesis should be formulated as follows:
A
H 0 :CAA R (−3 ,−1 )=0
A
H 1 : CAA R (−3 ,−1 ) ≠0
For the post-announcement cumulative abnormal returns, the null hypothesis and the
alternative hypothesis should be formulated as follows:
A
H 0 :CAA R ( +1 ,+ 3 )=0
A
H 1 : CAA R (+1 ,+3)≠ 0
The merged one sample t-test results for both the pre-announcement and the post-
announcement abnormal returns are presented in the table below (table 8):
Table 8. Results of the one-sample t-test
A
CAA R (τ 1 , τ 2) t-statistic P-value
( τ 1 , τ 2 ) =(−3 ,−1) 0.0003826 0.2179 0.8278
( τ 1 , τ 2 ) =(+1 ,+3) -0.0029715 -0.9185 0.3602
Using the p-value decision rule, it can be concluded that both null hypotheses cannot be
rejected. Therefore, it can be concluded that both the pre-announcement and the post-
announcement abnormal returns for acquirers are not significantly different from zero. This
result provides some grounding for why there is no statistically significant difference between
the pre-announcement cumulative abnormal returns and the post-announcement cumulative
abnormal returns.
After comparing the cumulative abnormal returns during the pre-announcement and the
post-announcement period, it can be checked when the announcement effect gets reflected in the
stock price of acquiring banks. To find this out, the following null hypothesis should be tested
A
H 0 : AA R τ =0
A
H a : AA R τ ≠ 0
where the event period τ takes every integer value from the interval [-10; +10]. To test this, a
one-sample t-test should be used. The results of testing each day’s abnormal returns for
significance are presented in the table below (table 9):
85
AAR AAR AAR
Day -10 -0.08% Day -3 -0.12% Day +4 -0.07%
Day -9 -0.08% Day -2 0.08% Day +5 -0.01%
Day -8 -0.14% Day -1 0.08% Day +6 -0.25%**
Day -7 -0.03% Day 0 -1.67%*** Day +7 -0.10%
Day -6 0.10% Day +1 -0.67%** Day +8 -0.06%
Day -5 0.04% Day +2 0.34%** Day +9 0.25%**
Day -4 0.11% Day +3 0.03% Day +10 -0.02%
Statistically significant results have been obtained on day 0, day +1, day +2, day +6, and
day +9. Day 0 and day +1 represent the immediate market reaction to the deal announcement. On
average, the market reacts negatively to that: stock price of acquirers earn negative returns of -
1.67% and -0.67% during the first two days. On day +2, probably something that is called “price
rebound” can be observed. After the negative reaction, the market “sleeps on” the announcement,
and the stock price gets corrected, for example, for possible overreaction during the first two day.
It is hard to explain the statistically significant return on day +6 and even harder to
explain the statistically significant return on day +9. It may be assumed that some regulatory
response is announced on one of these days, which leads to either positive reaction on day +6 or
negative reaction on day +9.
AAR on all other days have not been shown to be statistically significant on conventional
levels. AAR during the pre-run period, i.e. from day -6 to day -1, except for day -3, are positive,
but are not statistically significant. Thus, there is no evidence suggesting that the phenomenon of
informed trading takes place on the U.S. bank M&A market.
The obtained results can be easily observed on the graph below:
86
Fig. 3.5. The dynamics of acquirer AARτ and CAAR(τ1, τ2)
The graph is featuring plotted values of acquiring banks’ average abnormal returns and
cumulative average abnormal returns on each day τ from the event window (τ1, τ2) = (-10, +10)
starting from day τ = -10. As can be observed, AARτ values look somewhat considerable on day
0, day +1 and day +2. On day 0, right after the announcement, acquirers’ stock price experiences
a negative return. The same goes for day +1. As for day +2, a slight positive return can be seen,
probably as a result of the price rebound. As for other days, AAR τ values fluctuate around zero.
Given the negative market reaction upon the announcement, the value of CAAR(τ1, τ2) drops
down on day 0 and +1. After that, CAAR(τ1, τ2) values can be seen fluctuating somewhere
around -2.0% and -2.5% till the end of the event window.
3.2.5. Event Study of Targets’ Abnormal Returns
After analyzing the abnormal returns of acquiring banks, it is possible to proceed to
analyzing the abnormal returns of target banks.
First, it needs to be checked if there is a statistically significant difference between the
cumulative abnormal returns of target banks during the pre-announcement period and those
during the post-announcement period. Again, the difference in cumulative abnormal returns is to
be tested between event windows of (τ1, τ2) = (-3, -1) and (τ1, τ2) = (+1, +3), as the abnormal
returns (if any) are usually the most pronounced during these two event windows. This can be
tested using a two-sample mean comparison test. But first, it is needed to check if these two
samples have different variances, as this will affect the specific two-sample mean comparison
test that should be used. For the variance difference test, the null hypothesis and the alternative
hypothesis are formulated below:
2 2
H 0 :σ CA R T
i
(−3 ,−1 ) −σ CA R T
i
( +1 ,+3) =0
87
2 2
H 1 : σ CA R T
i
( −3 ,−1 ) −σ CA R T
i
( +1 ,+ 3) ≠0
The null hypothesis should be tested against the alternative hypothesis using the F-test for
the difference between variances in two samples. The results of the F-test are presented in the
Table 10. Results of the standard deviation comparison test
SCA R T
( −1 ,−3 )
SCA R T
( +1 ,+3 ) F-statistic P-value
i i
Standard Deviation
0.0458 0.1419 0.1041 0.0000
Comparison Test
significant difference at 1% level between the variances of CA RTi (−3 ,−1) and CA RTi (+1 ,+ 3) .
Therefore, Welch’s t-test for comparing means of two samples with unequal variances should be
used to compare the cumulative abnormal returns of target banks during the pre-announcement
period and during the post-announcement period. In order to find out if there is a difference, the
following null hypothesis should be tested against the further following alternative hypothesis:
T T
H 0 :CAA R (−3 ,−1 ) −CAA R (+ 1,+3 )=0
T T
H a :CAA R (−3 ,−1 ) −CAA R (+1 ,+3)≠ 0
The results of the Welch’s t-test are presented in the table below (table 11):
Two-sided Right-sided
T T
critical critical
CAA R (−3 ,−1) CAA R (+ 1,+3) t-statistic
value value
(α=0.05) (α=0.05)
Mean
Comparison 0.0049174 0.0811886 -5.6978 1.9761 1.65521
Test
statistic falls into the rejection region. Therefore, the null hypothesis is rejected. That means that
as far as target banks are concerned, there is a statistically significant difference between the pre-
announcement cumulative abnormal returns and the post-announcement cumulative abnormal
returns.
88
T T
H 0 :CAA R (−3 ,−1 ) −CAA R (+ 1,+3 )=0
T T
H 0 :CAA R (−3 ,−1 ) −CAA R (+ 1,+3 )< 0
Again, the calculated t-statistic lies in the rejection region. Therefore, the null hypothesis
is rejected. Thus, based on the results of both tests, as far as target banks are concerned, the post-
announcement cumulative abnormal returns significantly greater than the pre-announcement
cumulative abnormal returns.
It is also necessary to check if the cumulative abnormal returns during both the pre-
announcement period and the post-announcement period are statistically significant on their own.
This can be checked using a one-sample t-test. For the pre-announcement cumulative abnormal
returns, the null hypothesis and the alternative hypothesis should be formulated as follows:
T
H 0 :CAA R (−3 ,−1 ) =0
T
H 1 : CAA R (−3 ,−1 ) ≠0
For the post-announcement cumulative abnormal returns, the null hypothesis and the
alternative hypothesis should be formulated as follows:
T
H 0 :CAA R ( +1 ,+ 3 )=0
T
H 1 : CAA R (+1 ,+3)≠ 0
The merged one sample t-test results for both the pre-announcement and the post-
announcement abnormal returns are presented in the table below (table 12):
Table 12. Results of the one-sample t-test
T
CAA R ( τ 1 , τ 2) t-statistic p-value
( τ 1 , τ 2 ) =(−3 ,−1) 0.0049174 1.1961 0.2339
( τ 1 , τ 2 ) =(+1 ,+3) 0.0811886*** 6.3731 0.0000
As for the pre-announcement abnormal returns, using the p-value decision rule, it can be
concluded that the null hypotheses cannot be rejected. This means that the pre-announcement
cumulative abnormal returns for target banks are not significantly different from zero.
89
As for the post-announcement abnormal returns, the result is the opposite. Using the p-
value decision rule, it can be concluded that the null hypothesis is rejected. That is, the post-
announcement cumulative abnormal returns for targets are significantly different from zero at
1% level.
After comparing the cumulative abnormal returns during the pre-announcement and the
post-announcement period, it can be checked when the announcement effect gets reflected in the
stock price of acquiring banks. To find this out, the following null hypothesis should be tested
T
H 0 : AA R τ =0
T
H a : AA R τ ≠ 0
where the event period τ takes every integer value from the interval [-10; +10]. To test this, a
one-sample t-test should be used. The results of testing each day’s abnormal returns for
significance are presented in the table below (table 13):
Table 13. Results of the target AAR significancy tests
AAR AAR AAR
Day -10 0.32%** Day -3 0.13% Day +4 -0.02%
Day -9 -0.16% Day -2 0.15% Day +5 -0.06%
Day -8 0.01% Day -1 0.21% Day +6 -0.10%
Day -7 -0.12% Day 0 8.26%*** Day +7 -0.22%**
Day -6 0.22% Day +1 7.78%*** Day +8 -0.03%
Day -5 -0.04% Day +2 0.29%** Day +9 0.12%
Day -4 -0.11% Day +3 0.06% Day +10 0.02%
Statistically significant results have been obtained on day -10, day 0, day +1, day +2, and
day +7. Day 0 and day +1 represent the immediate market reaction to the deal announcement. On
average, the market reacts rather positively to that: stock price of acquirers earns positive returns
of 8.26% and 7.78% during the first two days. On day 2, the return of 0.29% is positive as well,
but considerably less than the returns of day 0 and day +1.
It is hard to explain the statistically significant returns on day -10 and day +7. Normally,
a statistically significant return during the pre-announcement should be a sign of information
leakage taking place on the market. However, as this happens rather early, it is not enough to
90
make any conclusions. As for the negative return on day +7, it might be connected to some
external event taking place around 6-7 days after the announcement. Perhaps there is some form
of regulatory approval or disapproval being issued one week after the announcement. The
statistically significant negative return on day +7 is also interesting for the reason that a return of
the same nature can be observed for acquiring banks just one day earlier, on day +6.
On all other days, AAR values have not been shown to be statistically significant on
conventional levels. AAR during the pre-run period, i.e. from day -3 to day -1, are positive and
increasing, but are not statistically significant. Thus, there is no evidence suggesting that the
phenomenon of informed trading takes place on the U.S. bank M&A market in regard to targets.
Thus, based on the analysis of AAR values, it is possible to conclude that the
announcement effect gets reflected in the stock price of targets right after the deal has been
announced, i.e. neither earlier nor later than that. Positive reaction persists till day +2, still
bursting on day +1 and fading on day +2.
The obtained results can be easily observed on the graph below:
Fig. 3.6. The dynamics of target AARτ and CAAR(τ1, τ2)

It can be seen that there are no significant returns up to day 0. That is, both AAR τ and
CAAR(τ1, τ2) values fluctuate around 0% during the first 10 days. However, considerable
positive returns can be observed on day 0 and on day 1. This is related to the proved to be
statistically significant announcement effect that gets reflected in the stock price on day 0. After
day 1, there are considerable abnormal returns that can be seen on the graph. AAR τ values
fluctuate around 0%, while CAAR(τ1, τ2) values fluctuate somewhere between 16% and 18%.
91
3.3. Regression Analysis Results
3.3.1. Introduction to The Regression Analysis
This section is devoted to presenting the results of the regression analysis. The aim of the
regression analysis is to fulfill the second part of the research goal, i.e. to find out how the stock
price behavior around the announcement of M&A deals of U.S. banks is influenced by factors
other than the announcement effect. The following analysis complements the event study
methodology by making it possible to draw more sophisticated conclusions on the nature of the
abnormal returns associated with the M&A deals of U.S. banks.
The regression analysis plans to answer the 4 th research question being addressed by this
paper:
 What are the factors – deal-related, economics-related, company-related – affecting the
In order to provide a sufficient answer to these questions, two different regression models
have been constructed – a regression model for acquiring banks and a regression model for target
banks. These models are addressed in sections 3.3.2 and 3.3.3 respectively. Both models are
constructed using the factors listed in section 2.2.2. of Chapter 2.
However, before proceeding with constructing the models, it is required to get the
descriptive statistics of the analyzed dataset. The output is presented in the figure below:
Table 14. Descriptive statistics of the dataset
Variable Obs Mean Std. Dev. Min Max
CAR_ACQ 124 -0.0193213 0.0463953 -0.1395998 0.0927838
CAR_TARG 124 0.1686737 0.1852586 -0.4812197 0.8384942
VALUE 124 859.4844 2614.025 87.227 28281.59
STOCK 124 0.483871 0.5017671 0 1
INTER 124 0.5403226 0.5003932 0 1
PERFA 124 0.0317267 0.171974 -0.3840684 0.6151756
PERFT 124 0.2125989 0.3123348 -0.4642366 1.607261
RELSIZE 124 0.2904758 0.2273111 0.0077837 1.088027
RATE 124 0.0073177 0.0081213 0.0007 0.0245
REG 124 0.233871 0.4250083 0 1
92
The following inferences can be made about the regression factors from the summary
data presented in the table above:
 On average, stock prices of the acquiring banks suffer a -1.9% loss upon merger
announcement;
 On average, stock prices of the target banks enjoy a 16.87% gain upon merger
announcement;
 48% of deals were financed solely by stock;
 54% of deals involve banks from different states;
 On average, acquiring banks enjoyed 3.17% above-market returns one year prior to the
merger announcement;
 On average, target banks enjoyed 21.26% above-market returns one year prior to the
merger announcement;
 On average, the acquiring banks are roughly 3 times bigger than target banks;
 On average, the Federal Funds Rate was close to zero at 0.7% level throughout the
observed period;
 Roughly 75% of deals have taken place under the strict regulation rules.
Now, having analyzed the descriptive statistics, it is possible to proceed with the results
of the regression analysis presented in the upcoming sections.
3.3.2. Regression Model for Acquiring Banks
The regression model for acquiring banks consists of the following variables:
o STOCK: dummy variable indicating if the deal is financed only by cash;
o PERFA: indicator of the pre-merger announcement performance of the acquiring
bank in the sample measured as the bank’s return on stock for the period from day
93
-260 to day -10 later decreased by the return of the Dow Jones U.S. Bank Index
o RELSIZE: target’s market capitalization on the announcement date divided by the
market capitalization of the acquirer on the announcement date;
Now it is possible to proceed with construction of the model. The first step is to check the
model for outliers using the box-whisker plot and to exclude those observations that would be
deemed outliers. The box-whisker plot of the CAR variable is presented below:
-.15 -.1 -.05 0 .05 .1

CAR
Fig. 3.7. Box-whisker plot of the bidding banks’ CAR values

According to the graph, there are two outlying observations based on the CAR variable.
Those belong to the deal between Southside Banchshares Inc. and OmniAmerican Bancorp Inc.
announced on April, 04, 2014, and to the deal between Hampton Roads Bankshares Inc. and
Xenith Bankshares Inc. announced on February, 10, 2016.
Another box-whisker plot for the LOGVALUE variable is presented in the figure below:
94
4 6 8 10
LOGVALUE
Fig. 3.8. Box-whisker plot of the logarithm of deal value

There is just one outlier, and it is a recently consummated multi-billion deal between
BB&T and SunTrust announced on February 7, 2019.
Thus, after excluding the outliers, the dataset set used for the regression model consists of
121 observations. The next step after removing the outliers is obtaining the correlation matrix of
all the variables suggested for the regression model. The correlation matrix is presented below:
Table 15. Correlation matrix of the factors used in the model for the acquiring banks
CAR LOGVALUE STOCK INTER PERFA RELSIZ RATE
E
CAR 1.000
LOGVALUE -0.2455* 1.0000
STOCK 0.0971 -0.0639 1.0000
INTER -0.1019 0.2472* -0.0544 1.0000
PERFA -0.0700 0.0246 0.1303 -0.1477 1.0000
RELSIZE -0.1077 0.3896* 0.0977 -0.1759 -0.0968 1.0000
RATE -0.1812* 0.1238 0.0566 0.0349 -0.1165 -0.0847 1.0000
REG -0.1580 0.1009 0.0619 0.0680 -0.1370 -0.0850 0.9193*
Asterisks next to values indicate the statistical significance of the respective values at the
5% level. A statistically significant negative correlation between the dependent variable and
LOGVALUE and RATE variables can be observed. The correlation coefficient is not that high,
but still there might be a statistically significant relationship between these variables in the
model.
95
Also, it can be seen that the natural logarithm of deal value is positively and significantly
correlated with such variables as INTER and RELSIZE. The correlation between LOGVALUE
and INTER variables is not that high, while the correlation between LOGVALUE and RELSIZE
variables is somewhat worth paying attention to. Later, it will be important to check these two
factors for multicollinearity using variance inflation factors (VIFs).
Another statistically significant correlation can be observed between RATE and REG
variables. The level of correlation is very high, close to 1. This can be explained by the fact that
the Federal Reserve started backing off from the Quantitative Easing policy by raising interest
rates starting from circa 2016. At the same time, the Crapo Bill was enacted in the beginning of
2018. The pattern can be easily seen here: near-zero interest rates can be observed during the
period of 2010-2016, and the Dodd-Frank Act was in its full power back then; after that, rates
started climbing up, and somewhere along the way the Crapo Bill was enacted. It explains the
high correlation between RATE and REG variables. Due to the high coefficient of correlation
and hence multicollinearity, one of the variables has to be excluded from the mode. Given that
there are not that many only-cash deals in the sample, it is safe to exclude the RATE variable and
keep the REG variable.
The initial version of the model looks as follows:
Table 16. Initial regression model for the acquiring banks

Source Sum of Squares Degrees of Mean Sum of Squares
Freedom
Model 0.02387891 6 0.003979818
Residual 0.211514988 114 0.001855395
Total 0.235393899 120 0.001961616
Number of F (6, 114) Prob > F R2 Adjusted R2 Root MSE
observations
121 2.14 0.0535 0.1014 0.0541 0.04307
Coef. Std. Err. t P > |t| [95% Conf. Interval]
LOGVALUE -0.0079663* 0.0047147 -1.69 0.094 -0.017306 0.0013734
STOCK 0.0099187 0.0080307 1.24 0.219 -0.0059901 0.0258275
INTER -0.006039 0.008606 -0.70 0.484 -0.0230873 0.0110093
96
PERFA -0.0273296 0.0235727 -1.16 0.249 -0.074027 0.0193677
RELSIZE -0.0127632 0.0201608 -0.63 0.528 -0.0527015 0.0271751
REG -0.0170003* 0.0095545 -1.78 0.078 -0.0359277 0.0019271
_cons 0.0363632 0.0254419 1.43 0.156 -0.0140369 0.0867634
It can be observed that the model is itself is statistically significant at the 10% level, as
well as the variable LOGVALUE and REG are statistically significant at 10% level. The results
of the multicollinearity test are presented in the figure below:
Table 17. Test fot multicollinearity in the initial model
Variable VIF 1/VIF
LOGVALUE 1.39 0.718347
RELSIZE 1.35 0.742078
INTER 1.20 0.835059
PERFA 1.07 0.937869
REG 1.06 0.944419
STOCK 1.05 0.952673
Mean VIF 1.19
The problem of low number of statistically significant variables has to be addressed. It
might be due to the fact that it is wrongly specified. In this case, it is required to look at the
scatterplots showing the dependent variable plotted against each of the independent variable.
Doing this can give clues on how to better specify the relationship between the dependent
variable and independent variables.
` In the figure below presenting the scatterplot (fig. 3.13), the value of CAR are plotted
against the value of LOGVALUE:
97
.1
.05
0
CAR
-.05
-.1
-.15
4 5 6 7 8 9
LOGVALUE
Fig. 3.9. Scatterplot of CAR and LOGVALUE variables

According to the graph, it can be assumed that there is a negative quadratic relationship
that exists between the CAR and LOGVALUE variables.
Next is the scatterplot presenting the CAR values being plotted against the PERFA
values:
.1
.05
0
CAR
-.05
-.1
-.15
-.4 -.2 0 .2 .4 .6
PERFA
Fig. 3.10. Scatterplot of CAR and PERFA variables

This scatterplot suggests that there is a positive quadratic relationship between the CAR
and PERFA variables.
Finally, the scatterplot with values of CAR and RELSIZE is presented below:
98
.1
.05
0
CAR
-.05
-.1
-.15
0 .2 .4 .6 .8 1
RELSIZE
Fig. 3.11. Scatterplot of CAR and RELSIZE variables

On the one hand, the relationship between the CAR and SIZE variables seems quadratic.
However, it might be that the graph of the y=x −√ x function might be a better fit for the dots:
Fig. 3.12. Graph of the y=x −√ x function

To account for all the suggested specifications, the following variables have been created and
added to the model:
 LOGVALUE 2=LOGVALU E
2
 PERFA 2=PERF A
2
 SQRTRELSIZE=RELSIZ E =√ RELSIZE
0.5
The output of the model that is adjusted for better specification of independent variables is
presented in the figure below:
Table 18. First version of the adjusted regression model for the acquirers
Freedom
Model 0.048221198 9 0.005357911
Residual 0.187172701 111 0.001686241
99
Total 0.235393899 120 0.001961616
observations
121 3.18 0.0019 0.2049 0.1404 0.04106
LOGVALUE 0.1049123** 0.045431 2.31 0.023 0.0148878 0.1949369
LOGVALUE2 -0.008711** 0.0036167 -2.41 0.018 -0.0158778 -0.0015442
STOCK 0.0037492 0.0079875 0.47 0.640 -0.0120785 0.0195769
INTER -0.0097442 0.0082627 -1.18 0.241 -0.0261174 0.006629
PERFA -0.0480284* 0.0256208 -1.87 0.063 -0.0987977 0.0027409
PERFA2 0.1925169** 0.0899567 2.14 0.035 0.0142617 0.3707722
RELSIZE 0.1047495 0.0770544 1.36 0.177 -0.0479388 0.2574379
SQRTRELSIZE -0.1483493* 0.0863861 -1.72 0.089 -0.3195291 0.0228304
REG -0.0129603 0.0092534 -1.40 0.164 -0.0312965 0.0053758
_cons -0.2798794** 0.1366758 -2.05 0.043 -0.5507115 -0.0090472
After the adjustments for better specification, the model looks much better. The overall
significance of the model is present, 6 out of 9 independent variables are statistically significant,
with 3 of them being significant at 5% level. Still, it is possible to achieve an even better fit for
the model if the power used for the second variable of SIZE is not 0.5 but rather 0.87, as has
been heuristically checked. That is, the following variable should replace the SQRTSIZE
variable: ¿ SIZ E 0.87. The resulting model is presented below:
Table 19. Second version of the adjusted regression model for the acquirers
Freedom
Model 0.048394789 9 0.005377199
Residual 0.186999109 111 0.001684677
Total 0.235393899 120 0.001961616
observations
100
121 3.19 0.0018 0.2056 0.1412 0.04104
LOGVALUE 0.1037872** 0.0453191 2.29 0.024 0.0139843 0.19359
LOGVALUE -0.0086109** 0.0036082 -2.39 0.019 -0.0157608 -0.001461
2
STOCK 0.0037572 0.0079832 0.47 0.639 -0.012062 0.0195764
INTER -0.0097841 0.0082597 -1.18 0.239 -0.0261513 0.006583
PERFA -0.0490396* 0.025495 -1.92 0.057 -0.0995597 0.0014805
PERFA2 0.1917478** 0.0899359 2.13 0.035 0.0135339 0.3699618
RELSIZE 0.5469524* 0.3268339 1.67 0.097 -0.1006909 1.194596
RELSIZE87 -0.5747673* 0.32885 -1.75 0.083 -1.226405 0.0768709
REG -0.0135494 0.0092737 -1.46 0.147 -0.0319258 0.004827
_cons -0.2892818** 0.1366459 -2.12 0.036 -0.5600548 -0.0185088
The results of the statistical tests from the output of the regression analysis presented in
the table above are as follows:
 The model is significant at 1% level;
 20.56% of the variance in the dependent variable is explained by the independent
variables;
 LOGVALUE and LOGVALUE2 variables are statistically significant at 5% level;
 STOCK variable is not statistically significant;
 INTER variable is not statistically significant;
 PERFA and PERFA2 variables are statistically significant at 10% and 5% levels
respectively;
 SIZE and SIZE87 variables are statistically significant at 10% level;
 REG variable is not statistically significant;
 The intercept term is statistically significant at 5% level.
Now, the statistical meaning of the results needs be interpreted into what the results
actually mean:
101
 On average and ceteris paribus, the cumulative abnormal returns of acquiring banks grow
together with the deal value, but after a certain deal value is reached, the cumulative
abnormal returns start decreasing;
 The payment method used by the acquirer does not affect the cumulative abnormal
returns of the bank;
 Location of the target’s HQ does not influence the cumulative abnormal returns of the
bidders;
 On average and ceteris paribus, acquiring banks’ pre-merger performance negatively
affects the cumulative abnormal returns, but after a certain pre-merger level of
performance is reached, the pre-merger returns start contributing positively to the
cumulative abnormal returns;
 On average and ceteris paribus, the cumulative abnormal returns are negatively affected
by the relative size of the targets to bidding banks, but after reaching a certain ratio the
relative size positively contributes to the cumulative abnormal returns.
 Regulatory regime in the banking industry does not affect the cumulative abnormal
returns of acquirers.
Now that these descriptive statements have been made, it is needed to address them from
the economic perspective. First, the increasing deal value positively affects the cumulative
abnormal returns at first because the market might be thinking that really small deals are not as
profitable as bigger deals. However, reaching a certain point of deal value makes the market
change its opinion: high deal value might signify that the premiums paid by the acquiring banks
are too high. Also, a deal with higher values is more likely to attract the attention of regulatory
bodies to itself, which usually comes together with the slowdown of the merger process. Hence
the observed relationship.
Positive quadratic relationship between the cumulative abnormal returns and pre-merger
performance can be explained by the fact that underperforming banks tend to use merger deals as
a last resort for enhancing their performance. That is why severe underperformance can
positively contribute to the abnormal returns earns by acquiring banks. Then this contribution
starts to diminish together with lowering severity of underperformance. At one point, however,
overperformance starts to positively affect the abnormal returns. One possible reason for this
might be the overperforming bank’s stock gains. Seeing that the bank’s stock price has risen
102
significantly in the recent period, the market might expect the respective bank to put the gains to
good use, and one way to do so is to finance a merger deal using stock. If the overperforming
bank manages to do so, the market awards it with higher cumulative abnormal returns upon the
announcement.
As for the relative size of target banks, it is possible to assume that the average market
reaction is rather negative. However, when the market capitalization of target banks is getting
closer to the market capitalization of acquirers, the reaction changes. One possible reason for this
might be that the market sees merger deals between comparable-in-size banks as more disrupting
to the competition in the industry and hence more likely to create profits for the future unified
bank in comparison with deals involving a big acquirer and a small target. Thus, “merger-of-
equals” deals or deals close to be called so manage to provoke a more positive market reaction
than the merger between big and small banks.
3.3.3. Regression Model for Target Banks
The regression model for acquiring banks consists of the following variables first
mentioned in Chapter 2:
o STOCK: dummy variable indicating if the deal is financed only by cash;
o PERFT: indicator of the pre-merger announcement performance of the target bank
in the sample measured as the bank’s return on stock for the period from day -260
to day -10 later decreased by the return of the Dow Jones U.S. Bank Index
o RELSIZE: target’s market capitalization on the announcement date divided by the
market capitalization of the acquirer on the announcement date;
103
Now it is possible to proceed with construction of the model. The first step is to check the
model for outliers using the box-whisker plot and to exclude those observations that would be
deemed outliers. The box-whisker plot of the CAR variable is presented below:
-.5 0 .5 1
CAR
Fig. 3.13. The box-whisker plot of the target banks’ CAR values
According to the graph, there are four outlying observations based on the CAR variable.
These observations correspond to the merger deals between the following banks:
 M&T Bank Corp and Wilmington Trust Corp announced on November 1, 2011;
 Columbia Financial Inc and Stewardship Financial Corp announced on June 7, 2019;
 FNB Corp and Parkvale Financial Corp announced on June 15, 2011;
 Berkshire Hills Bancorp Inc. and Legacy Bancorp Inc. announced on December 22, 2010.
The next box-whisker plot showing the values of the LOGVALUE variable is presented
in the figure below:
104
4 6 8 10
LOGVALUE
Fig. 3.14. The box-whisker plot of the deal values

According to the graph, there is just one outlying value. It is the same deal that has
already been deemed an outlier in the model for acquiring banks: the deal between BB&T and
SunTrust announced on February 7, 2019.
Thus, after excluding 5 outliers from the dataset for the target banks’ regression model,
there are 119 observations left. The next step after removing the outliers is obtaining the
correlation matrix of all the variables suggested for the regression model. The correlation matrix
is presented below:
Table 20. Correlation matrix of the factors used in the model for target banks
CAR LOGVALUE STOCK INTER PERFT RELSIZE RATE
CAR 1.0000
LOGVALUE -0.4344* 1.0000
STOCK -0.2002* -0.0888 1.0000
INTER -0.0950 0.2303* -0.0721 1.0000
PERFT -0.1224 -0.0900 0.1854* -0.0455 1.0000
RELSIZE -0.3871* 0.3780* 0.1005 -0.203* 0.0414 1.0000
RATE -0.2180* 0.1411 0.0849 0.0579 -0.2635* -0.0874 1.0000
REG -0.1288 0.1187 0.0830 0.0908 -0.3346* -0.0845 0.9166*
Asterisks next to the values indicate the statistical significance of the respective values at
the 5% level. As for the dependent variable, there is a statistically significant correlation between
105
it and the following independent variables: LOGVALUE, STOCK, RELSIZE, RATE. This
speaks in favor of these variables being significant factors in the regression model.
As for the dependent variables, there is a statistically significant correlation between the
following pairs of variables: LOGVALUE and INTER, LOGVALUE and RELSIZE, STOCK
and PERFT, INTER and RELSIZE, PERFT and RATE, PERFT and REG, RATE and REG.
Significant coefficient of correlation signifies that there is a high chance of multicollinearity
being present between these variables. Again, the REG variable is excluded from the model on
the pre-estimation stage to avoid the potential problem of multicollinearity.
After checking the correlation between the variables that are to be included in the model,
it is possible to obtain the initial version of the regression model for the target banks:
Table 21. Initial regression model for the target banks
Freedom
Model 0.928736671 6 0.154789445
Residual 1.92542962 112 0.017191336
Total 2.85416629 118 0.02418785
Number of F (6, 112) Prob > F R2 Adj R2 Root MSE
observations
119 9.00 0.0000 0.3254 0.2893 .13112
LOGVALUE -0.0516157*** 0.01441 -3.58 0.001 -0.0801673 -0.023064
STOCK -0.0513508** 0.0252037 -2.04 0.044 -0.1012887 -0.001413
INTER -0.0250574 0.0262109 -0.96 0.341 -0.0769909 0.0268761
PERFT -0.0824299* 0.0429205 -1.92 0.057 -0.1674714 0.0026116
RELSIZE -0.1852904*** 0.0621577 -2.98 0.004 -0.3084479 -0.0621329
REG -0.0540499* 0.0313601 -1.72 0.088 -0.1161859 0.0080862
_cons 0.5913685*** 0.0793365 7.45 0.000 0.4341735 0.7485635
The following inferences can be made about the model based on the data presented in the
table above:
 The model is statistically significant at 1% level;
106
 LOGVALUE variable is statistically significant at 1% level;
 STOCK variable is statistically significant at 5% level;
 PERFT variable is statistically significant at 10% level;
 RELSIZE variable is statistically significant at 1% level;
 REG variable is statistically significant at 10% level;
 Intercept term is statistically significant at 1% level.
Test for multicollinearity is done using the VIF values. The results of the test are
Table 22. Test for multicollinearity of the initial model for the target banks
Variable VIF 1/VIF
LOGVALUE 1.38 0.726411
RELSIZE 1.35 0.739067
REG 1.19 0.837432
PERFT 1.19 0.841349
INTER 1.18 0.848371
STOCK 1.10 0.911302
Mean VIF 1.23
Apparently, no multicollinearity is present in the model, as can be inferenced based on
the data from the table above.
Further, it is required to check if the model can be better specified. This can be done
using the scatterplots which show the dependent variable being plotted against the dependent
variables.
The scatterplot featuring CAR values being plotted against the LOGVALUE values is presented
in the figure below:
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.6
.4
CAR
.2
0
-.2
4 5 6 7 8 9
LOGVALUE
Fig. 3.15. Scatterplot of LOGVALUE and CAR varaibles

From the scatterplot, it can be concluded that there is a quadratic relationship between the
CAR and LOGVALUE variables.
The scatterplot featuring CAR values being plotted against the PERFT values is
.6
.4
CAR
.2
0
-.2
-.5 0 .5 1 1.5
PERFT
Fig. 3.16. Scatterplot of PERFT and CAR varaibles

From the scatterplot presented above (fig. 3.25), it is hard to conclude some relationship
other than a linear one.
The scatterplot featuring CAR values being plotted against the RELSIZE values is
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.6
.4
CAR
.2
0
-.2
0 .2 .4 .6 .8 1
RELSIZE
Fig. 3.17. Scatterplot of RELSIZE and CAR variables

From the scatterplot presented in the figure above (fig. 3.26), it is hard to conclude some
relationship other than a linear one.
Thus, based on the scatted plot analysis, a squared LOGVALUE variable should be
added to the regression model: LOGVALUE 2=LOGVALU E 2. The additionally specified
regression model looks as follows:
Table 23. The specified version of the target regression model
Freedom
Model 0.989007193 7 0.141286742
Residual 1.86515909 111 0.016803235
Total 2.85416629 118 0.02418785
Number of F (7, 111) Prob > F R2 Adj R2 Root MSE
observations
119 8.41 0.0000 0.3465 0.3053 0.12963
CAR Coef. Std. Err. t P > |t| [95% Conf. Interval]
LOGVALUE -0.317964** 0.1413549 -2.25 0.026 -0.5980682 -0.0378598
LOGVALUE 0.0213557* 0.0112761 1.89 0.061 -0.0009886 0.0436999
2
STOCK -0.0429313* 0.025311 -1.70 0.093 -0.0930868 0.0072242
INTER -0.021808 0.0259701 -0.84 0.403 -0.0732694 0.0296535
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PERFT -0.0855605** 0.0424655 -2.01 0.046 -0.1697087 -0.0014124
RELSIZE -0.1702664*** 0.061962 -2.75 0.007 -0.2930482 -0.0474847
REG -0.0578017* 0.0310673 -1.86 0.065 -0.1193637 0.0037603
_cons 1.390898*** 0.4293861 3.24 0.002 0.5400409 2.241755
The results of the statistical tests from the regression analysis output presented in the
table above are as follows:
 The model is significant at 1% level;
 34,65% of the variance in the dependent variable is explained by the independent
variables;
 LOGVALUE and LOGVALUE2 variables are statistically significant at 5% and 10%
levels respectively;
 STOCK variable is statistically significant at 10% level;
 PERFT variable is statistically significant at 5% level;
 RELSIZE variable is statistically significant at 1% level;
 REG variable is statistically significant at 10% variable;
 The intercept term is statistically significant at 1% level.
Now, the statistical meaning of the results needs be interpreted into what the results
actually mean:
 On average and ceteris paribus, the cumulative abnormal returns of target banks fall
together with the deal value, but after a certain deal value is reached, the cumulative
abnormal returns start increasing;
 On average and ceteris paribus, pure stock financing of the deal decreases cumulative
abnormal returns for the target;
 Location of the target’s HQ does not influence the cumulative abnormal returns of the
bidders;
 On average and ceteris paribus, target banks’ pre-merger performance negatively affects
the cumulative abnormal returns;
 On average and ceteris paribus, the cumulative abnormal returns are negatively affected
by the relative size of the targets to bidding banks;
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 On average and ceteris paribus, softened regulatory regime in the banking industry
negatively affects the cumulative abnormal returns of targets.
Now that these descriptive statements have been made, it is needed to address them from
the economic perspective. As for the quadratic relationship between the cumulative abnormal
returns, small deals yield high returns, medium deals yield low returns, and big deals yield high
returns again. It is possible to assume small deals yield high returns because the market strongly
believes in the fact that the deal will consummate, as a small deal will not create much market
disruption and will not undermine competition. Thus, market’s confidence in the deal gives
targets higher abnormal returns. However, the more a deal grows, the greater the risk of the deal
stumbling upon a regulatory intervention. Hence lower abnormal returns. But then, when deals
become even larger, target banks gain high abnormal returns again for the reason that premiums
for such deals are very likely overpaid.
Negative linear relationship between target banks’ pre-merger performance and
cumulative abnormal returns can be explained in the following way: the more profitable are the
target banks, the higher confidence the market has in them and their independent operations.
Therefore, when a well-performing target bank gets merged, it is an upset for the market that
expected that particular bank to continue its path of excellent performance.
Moreover, there is a negative relationship between the relative size of target banks to
their acquirers and the cumulative abnormal returns of target banks. This might be because
getting acquired by an equal bank is not as profitable as getting acquired by a bigger bank that
can potentially pay much more in comparison with the profits of a small target bank.
If the deal is all-stock, then target banks yield lower cumulative abnormal returns. This is
because acquirers tend to finance deals with stock when they know their stock is overvalued and
might fall down in price after the announcement. After the merger, this effect will have to be
shared by both the acquirer and the target, hence lower cumulative abnormal returns for the
target.
3.4. Managerial Implications

According to the initial statement of practical importance, managerial implications can be
divided into three different groups: stock traders, bank representatives and regulatory bodies.
This research provides some useful insights for stock traders. On average, if they want to
get better off as a result of the merger announcement, they have to be as fast as possible. This is
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due to the speed with which the announcement gets reflected in the stock price of both acquirers
and targets. To gain some profits from the acquirer side, stock traders should short the acquirers’
stock immediately after the announcement. As for the target side, it is imperative to go long as
soon as the press-release gets issued: the majority of the returns can be enjoyed during the first
two days. Moreover, the results of the regression analysis provide stock traders with some
ground for decision making. Given that they possess the information about the examined factors
in regard to the merging banks, they can get a better understanding of the level of the abnormal
returns that is likely to be experienced by the relevant stock. Having this understanding, they can
decide whether it is too late to enter either long or short position, i.e. whether the major part of
the supposed stock price movement has already taken place.
Representatives of the merging banks can get better understanding of how the
announcement of the deal will be reflected in the price of their stock. This is extremely important
when it comes to managing the investor relations. Investors of the acquiring banks often doubt
the restructuring initiatives, which gets reflected in the stock price. Thus, the investor relations
departments of acquiring banks have to be able to explain the observed negative stock price
movement to the investors who are not that familiar with merger deals. This research provides
the ground for such explanations: not only regarding the direction of the stock price movement,
but also regarding the degree to which stock price movement gets amplified as a result of the
effect of the examined factors. As for the investor relations departments of the target banks, they
need to be able to communicate the benefits of the merger deal. That is, acquisition of the bank
whose stock investors own, on average, comes together with a substantial financial return to the
stockholders of that bank.
Finally, the regulatory bodies are yet another group that benefits from this research. It has
been shown that, on average, there is no pronounced insider trading taking place of the U.S. bank
M&A market. This result has been obtained independently, which makes it more valuable. The
result proves that the regulatory bodies are doing their job good when it comes to preventing
leakage of insider information on the large-scale. However, the results also suggest that there
might be a need for case-by-case investigation. This is because the analysis of target banks’
average abnormal returns (AAR) showed an increase during the pre-run period, i.e. 3 days prior
to the announcement. The results are not statistically significant, but a further analysis conducted
by the accountable regulatory analysis might be useful.
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3.5. Research Limitations
The conducted research on the topic of the announcement effect of U.S. bank mergers has
used two main methodologies: event study methodology (ESM) and regression analysis
methodology. Even though the research was aimed at producing the most valuable and correct
results possible, there were some limitations that restricted the scope of the research, nonetheless.
On the other hand, these limitations can be considered the opportunities for additional research
that can be conducted on the topic of the announcement effect on the U.S. bank merger market.
The limitations are as follows:
 No distinction between the types of banks (commercial banks, investment banks, etc);
 No cross-border deals are included in the sample;
 Only deals classified as merger are included;
 No accounting for merger being a part of some particular bank’s strategy;
 Restriction on the deal value based on the Hart-Scott-Rodino Act;
 No accounting for the deal attitude due to the sample specificity.
First of all, there is no distinction between the types of banks in the sample. The majority
(if not all) of the banks in the sample are commercial banks, so the obtained results are valid for
this type of banks only. Probably it would be wrong to mix different types of banks in one
sample. It is logical to assume that there might be a different market reaction towards the merger
announcements of each type of banks due to the different attitude of the Federal Reserve to
different types of banks. Also, there might be problems with data sufficiency for a research on
the investment banks, as they do not engage in merger deals that often. Finally, due to the
Gramm-Leach-Bliley Act effectively repealing the provision of the Glass-Steagall Act, for a
research on different types of banks it would be necessary to strictly define each type of banks.
This is due to the fact that one banks can be considered both a commercial and an investment
bank: for example, JPMorgan Chase acts as an investment bank under the brand JPMorgan and
at the same time acts as a commercial bank under the brand Chase.
The decision to include only domestic deals into the sample was just a consequence of
the research design: the research was simply planned to deal with the domestic mergers.
However, it is possible to widen the scope of research and include cross-border deals. To do this,
it will be required to analyze the regulatory regime of the U.S. in regard to the cross-border deals
specifically as well as the regulatory regime of the home country of the second bank in the deal.
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The fact that only “merger” deals were included in the sample is another question
regarding the research design. It is probably possible to conduct a research on the deals classified
as “acquisition of the minority interest” or “acquisition of assets”, but that would be just a
different research.
One possible factor that could be potentially included into the regression model was the
experience of the acquiring bank in the merger business. It can be assumed that the market reacts
more positively to the acquirers with experience. This is because experienced acquiring banks
most likely employ this strategy of growth through merging and know how to steer through the
consolidation process gaining the most efficiencies in the process.
The sample has been slightly adjusted to include the deals with a deal value exceeding a
certain mark. This mark is updated on an annual basis by the Federal Reserve: only merger deals
with a deal value exceeding this mark must send the filings to the Securities and Exchange
Commission (SEC). The decision to do so was motivated by the desire to include only deals that
are the most to the market. However, had there been no such restriction, these deal would
probably have been excluded from the sample as well. The smaller the deal value, the higher the
chance that one or both banks in the deal are trading on the OTC market. Trading on the OTC
market does not take place regularly, so it would have been impossible to gather enough data for
the event study and thus the low value deals would have been excluded anyway.
Finally, one important factor that has been mentioned by the authors of academic papers
but still has not been included in the regression model is the deal attitude. The importance of this
factor was also shown in chapter 1, in the section devoted to theoretical aspects of M&A deals.
However, there was just no possibility to include this factor into the analysis for objective
reasons. Hostile takeovers have been either banned or severely restricted by the majority of
states. That is, they just do not happen anymore. There was a period of corporate raiding in the
United States in the 1970s, 1980s and 1990s, but not after that. Thus, given the period chosen for
analysis, it was not possible to account for deal attitude, as all deals happen on mutual consent of
both parties.
3.6. Summary
Having outlined the methodology that is to be used for the research in Chapter 2, Chapter
3 proceeds with the practical application of the proposed methodology and with the results
obtained in the process.
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First, the data sample used for the research is described. The collection of data is
described, as well as the funnel that was used to filter the initially obtained data. Then some
characteristics of the gathered data are described using graphs and simple calculations, for better
understanding of the analyzed dataset.
After that, the results of the event study methodology are presented. All the earlier stated
hypotheses have been tested using the corresponding statistical tests. The tested hypotheses
correspond to the following research questions:
Obtaining the results of the tests made it possible to answer the stated research questions
and understand the nature of the announcement effect on the U.S. bank market during the period
of 2010-2019. In general, the announcement effect is present on the market. On average, the
acquiring banks suffer a small loss during the first two days, while the target banks enjoy
significant returns during the first two days. Thus, the abnormal returns of the target banks are
significantly higher than the abnormal returns of the acquiring banks. For the acquiring banks, no
statistically significant difference has been observed between the pre-announcement and the
post-announcement abnormal returns. On the contrary, for the target banks, the post-
announcement abnormal returns are significantly higher than the pre-announcement abnormal
returns. As for when the abnormal returns are getting reflected in the stock price of the banks
involved in the deal, it has been observed that the abnormal returns get reflected immediately
upon the announcement: not earlier than that and during the 2-3 days following the
announcement.
After the results of the event study, the results of the regression analysis are presented in
a separate section. Two models, both for acquirers and targets, and presented and specified. As a
result, the fourth research question gets answered:
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For the acquiring banks, the following factors have been observed to be statistically significant:
the deal value, the pre-merger performance and the relative size of the target to the acquirer. For
the target banks, the following factors have been observed to be statistically significant: the deal
value, the method of payment, the pre-merger performance, the relative size of the target to the
acquirer, and the regulatory regime. It is worth noting that perhaps the most important and
valuable finding is that there are non-linear relationships between the abnormal returns and some
of the tested independent variables.
Finally, the obtained results are briefly discussed from the practical point of view. In
particular, some managerial implications stemming from the obtained theoretical results are
presented. The managerial implications are divided into three different groups based on the
interested party. To conclude the chapter and the research itself, several research limitations
and/or additional research opportunities have been described in the corresponding section.
After the foundation for the research being laid in Chapter 1 and the description of the
methodology from Chapter 2, Chapter 3 succeeds in presenting and explaining the results of the
research, thus logically concluding the research and the master thesis itself.
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CONCLUSION
Banks are playing a huge role in the U.S. economy and still remain one of the main
provisioners of loans both to businesses and individual consumers. In this paper, banks have
been examined in regard to their merger activity. Given the high fragmentation of the U.S.
banking industry, there are more than enough data for such research. And the research is more
than relevant, as the consolidation process is still going on.
The first part of the research is concerned with examining the presence of announcement
effect upon the merger announcements of deals between U.S. banks. It has been shown that there
is indeed an announcement effect being present on the U.S. bank merger market. On average
acquirers experience a slight negative return of 2% on the stock, while the shareholders of target
banks enjoy a 16-17% positive return. Thus, a statistically significant different between the
abnormal returns of acquirers and those of targets has been observed. There has been found to be
no different between the pre-announcement and post-announcement returns for acquiring banks;
in fact, both of these values are statistically insignificant. At the same time, for target banks, the
post-announcement abnormal returns have been found to be significantly higher than the pre-
announcement returns. Finally, no signs of prominent insider trading taking place on the U.S.
merger market have been observed: for both acquirers and targets, statistically significant
abnormal returns have been shown to appear not earlier than the announcement.
The second part of the research is concerned with identifying ex-ante factors potentially
impacting the value of the cumulative abnormal returns. A set of factors has been chosen based
on financial and economic concepts, as well as on the analysis of the academic literature on the
topic. Two regression models have been estimated using these factors: one model for the bidding
banks and another model for the target banks. Both models have been deemed overall
statistically significant. One very important finding is that some non-linear relationships have
been found to exist between the cumulative abnormal returns and some of the regression factors.
As for the acquirer regression model, it has been observed that the cumulative abnormal
returns are affected by the deal value, by the pre-merger performance of the acquirer and the
relative size of the target to the acquirer. Non-linear relationships have been observed to exist
between the deal value and the cumulative abnormal returns, between the relative size and the
cumulative abnormal returns. Such factors as the method of payment, the regulatory regime and
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the location of the headquarters of the merging banks have not been observed to have a
statistically significant effect on the cumulative abnormal returns of the acquiring banks.
As for the target regression model, it has been observed that the cumulative abnormal
returns are affected by the deal value, the method of payment, the pre-merger performance of the
target, by the relative size of the target to the acquirer and by the regulatory regime in the U.S.
banking industry. Only one non-linear relationship has been observed to exist: this relationship is
between the deal value and the cumulative abnormal returns. The factor of the locations of the
involved banks’ headquarters again has not been shown to be statistically significant. This is
likely because the risks associated with engaging in interstate merger deals were a significant
factor in the 1980s and 1990s, and now, during the age of wide interstate banking networks, it
does not really matter.
Again, given the continuing process of consolidation in the U.S. banking industry, the
conducted research is relevant. The results of the research can be used by stock traders, bank
representatives, regulatory bodies and any other interested parties; the application of the results
has been shown for the three aforementioned groups. Stock traders can make investing decision
based on the results of this research. Bank representatives, in particular, investor relations
department, can use the results of this research to communicate the message regarding the
merger to their shareholders. The regulatory bodies get a confirmation that, on average, they are
doing their job well in preventing the insider trading, but they also get a signal that there might
be a need for case-by-case investigation.
All in all, the U.S. banking industry is likely to become even more consolidated during
the course of the following years, so the results of this research will stay relevant, as well as there
will be a need for additional research based on the new merger deals in the U.S. bank M&A
market.
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APPENDIX
Appendix Table 1. List of the deals included in the sample
Deal Announcement Acquirer Bank Target Bank
Date
1 07-Feb-19 BB&T Corp SunTrust Banks Inc
2 21-May-18 Fifth Third Bancorp MB Financial Inc
3 30-Oct-15 KeyCorp, Cleveland, Ohio First Niagara Financial Group Inc
4 27-Aug-12 M&T Bank Corp Hudson City Bancorp Inc
5 26-Jan-16 Huntington Bancshares FirstMerit Corp
Inc, Columbus, Ohio
6 24-Jul-18 Synovus Financial Corp FCB Financial Holdings Inc
7 12-Nov-14 BB&T Corp Susquehanna Bancshares Inc
8 07-Mar-17 Sterling Bancorp Astoria Financial Corp
9 04-May-17 First Horizon National Capital Bank Financial Corp
Corp
10 17-Jun-19 Prosperity Bancshares Inc, LegacyTexas Financial Group Inc,
Houston, Texas Plano, Texas
11 11-Sep-13 Umpqua Holdings Corp Sterling Financial Corp
12 17-Aug-15 BB&T Corp National Penn Bancshares Inc,
Boyertown, Pennsylvania
13 23-Jan-17 Pinnacle Financial Partners BNC Bancorp, High Point, North
Inc Carolina
14 22-Dec-10 Hancock Holding Co Whitney Holding Corp, New Orleans,
Louisiana
15 08-Aug-18 WSFS Financial Corp Beneficial Bancorp Inc
16 21-Jul-16 FNB Corp, Pittsburgh, Yadkin Financial Corp
Pennsylvania
17 19-Aug-10 First Niagara Financial NewAlliance Bancshares Inc, New
Group Inc Haven, Connecticut
18 26-Jan-16 Chemical Financial Corp Talmer Bancorp Inc
19 22-May-18 Independent Bank Group Guaranty Bancorp
Inc
20 07-Dec-15 BBCN Bancorp Inc Wilshire Bancorp Inc
21 25-Jul-17 First Financial Bancorp, MainSource Financial Group Inc
Cincinnati, Ohio
22 18-Jun-18 BOK Financial Corp CoBiz Financial Inc
23 24-Jul-18 Veritex Holdings Inc Green Bancorp Inc
24 13-Sep-12 FirstMerit Corp Citizens Republic Bancorp Inc, Flint,
Michigan
25 18-Aug-16 United Bankshares Inc, Cardinal Financial Corp
Charleston, West Virginia
26 13-May-18 Cadence Bancorp State Bank Financial Corp
27 26-Nov-18 CenterState Bank Corp National Commerce Corp
28 26-Jun-19 Valley National Bancorp, Oritani Financial Corp
126
Wayne, New Jersey
29 15-Jul-19 People's United Financial United Financial Bancorp Inc
Inc
30 27-Mar-17 Home BancShares Inc Stonegate Bank, Fort Lauderdale,
Florida
31 17-Dec-18 Ameris Bancorp Fidelity Southern Corp
32 06-Apr-17 PacWest Bancorp CU Bancorp
33 20-Sep-18 Independent Bank Corp, Blue Hills Bancorp Inc
Rockland, MA
34 27-Apr-17 South State Corp Park Sterling Corp, Charlotte, NC
35 19-May-17 Union Bankshares Corp Xenith Bankshares Inc, Richmond,
VA
36 01-Nov-10 M&T Bank Corp Wilmington Trust Corp, Wilmington,
Delaware
37 15-Jul-13 MB Financial Inc Taylor Capital Group Inc
38 09-Jan-17 Columbia Banking System Pacific Continental Corp
Inc
39 05-Oct-18 Union Bankshares Corp Access National Corp
40 17-Nov-16 First Interstate BancSystem Cascade Bancorp, Bend, Oregon
Inc, Billings, MT
41 14-Dec-16 Simmons First National Southwest Bancorp Inc, Stillwater,
Corp Oklahoma
42 26-Sep-12 Columbia Banking System West Coast Bancorp
Inc
43 23-Jul-19 WesBanco Inc, Wheeling, Old Line Bancshares Inc
West Virginia
44 20-Jan-11 People's United Financial Danvers Bancorp Inc, Danvers,
Inc Massachusetts
45 30-Jun-17 OceanFirst Financial Corp Sun Bancorp Inc, Vineland, New
Jersey
46 12-Jan-16 Old National Bancorp Anchor BanCorp Wisconsin Inc
47 04-Aug-15 FNB Corp, Pittsburgh, Metro Bancorp Inc, Harrisburg,
Pennsylvania Pennsylvania
48 16-May-17 Sandy Spring Bancorp Inc WashingtonFirst Bankshares Inc
49 13-Oct-15 Yadkin Financial Corp NewBridge Bancorp
50 10-Jun-13 Union Bankshares Corp StellarOne Corp
51 30-Jan-13 United Bankshares Inc, Virginia Commerce Bancorp Inc
52 09-Mar-15 Western Alliance Bancorp, Bridge Capital Holdings
Las Vegas, Nevada
53 13-Dec-16 Pacific Premier Bancorp Heritage Oaks Bancorp
Inc
54 09-Nov-15 Bank of the Ozarks Inc C1 Financial Inc
55 01-Nov-17 Kearny Financial Corp Clifton Bancorp Inc
56 19-Apr-18 WesBanco Inc, Wheeling, Farmers Capital Bank Corp
127
West Virginia
57 08-Sep-14 BB&T Corp Bank of Kentucky Financial Corp
58 24-Apr-18 CenterState Bank Corp Charter Financial Corp
59 23-Nov-15 Capital Bank Financial CommunityOne Bancorp
Corp
60 20-Jun-11 Susquehanna Bancshares Tower Bancorp Inc
Inc
61 29-Oct-14 WesBanco Inc, Wheeling, ESB Financial Corp
West Virginia
62 27-Nov-18 People's United Financial BSB Bancorp Inc, Belmont, MA
Inc
63 27-Apr-17 TowneBank, Portsmouth, Paragon Commercial Corp
Virginia
64 24-Oct-16 Community Bank System Merchants Bancshares Inc,
Inc Burlington, Vermont
65 29-Apr-14 Southside Bancshares Inc, OmniAmerican Bancorp Inc
Tyler, Texas
66 08-May-14 Valley National Bancorp, 1st United Bancorp Inc, Boca Raton,
Wayne, New Jersey Florida
67 20-Feb-13 SCBT Financial Corp, First Financial Holdings Inc
Columbia, South Carolina
68 11-Dec-17 TriCo Bancshares, Chico, FNB Bancorp
California
69 09-Dec-10 Nara Bancorp Inc, Los Center Financial Corp, Los Angeles,
Angeles, California California
70 18-Sep-13 East West Bancorp Inc MetroCorp Bancshares Inc
71 26-Jan-11 Susquehanna Bancshares Abington Bancorp Inc, Jenkintown,
Inc PA
72 23-Oct-13 Cascade Bancorp, Bend, Home Federal Bancorp Inc, Nampa,
Oregon Idaho
73 23-Oct-13 Heritage Financial Corp Washington Banking Co
74 10-Dec-14 Renasant Corp Heritage Financial Group Inc
75 08-Dec-15 Univest Corp of Fox Chase Bancorp Inc
Pennsylvania
76 27-Jan-14 Yadkin Financial Corp VantageSouth Bancshares Inc
77 22-Apr-15 United Community Banks Palmetto Bancshares Inc
Inc
78 24-Oct-16 Access National Corp Middleburg Financial Corp
79 28-Apr-11 Valley National Bancorp, State Bancorp Inc, New Hyde Park,
Wayne, New Jersey New York
80 08-May-12 PacWest Bancorp First California Financial Group Inc
81 20-Apr-11 Brookline Bancorp Inc Bancorp Rhode Island Inc
82 08-Oct-12 NBT Bancorp Inc Alliance Financial Corp
83 31-Jul-14 Bank of the Ozarks Inc Intervest Bancshares Corp
84 17-Dec-15 TowneBank, Portsmouth, Monarch Financial Holdings Inc
128
Virginia
85 03-Dec-15 First Busey Corp, Urbana, Pulaski Financial Corp, St Louis,
Illinois Missouri
86 30-Apr-19 Hancock Whitney Corp MidSouth Bancorp Inc
87 03-May-16 WesBanco Inc, Wheeling, Your Community Bankshares Inc
West Virginia
88 28-Jan-16 Pinnacle Financial Partners Avenue Financial Holdings Inc
Inc
89 05-Jan-16 OceanFirst Financial Corp Cape Bancorp Inc
90 15-Dec-14 Northwest Bancshares Inc LNB Bancorp Inc
91 09-Aug-19 OceanFirst Financial Corp Two River Bancorp
92 11-Dec-18 Berkshire Hills Bancorp SI Financial Group Inc
Inc
93 21-Jan-14 TriCo Bancshares, Chico, North Valley Bancorp
California
94 15-Aug-13 Mercantile Bank Corp, Firstbank Corp, Alma, Michigan
Grand Rapids, MI
95 12-Jun-17 Carolina Financial Corp First South Bancorp Inc, Washington,
NC
96 13-Jan-14 IBERIABANK Corp Teche Holding Co, New Iberia,
Louisiana
97 17-Nov-17 Ameris Bancorp Atlantic Coast Financial Corp
98 24-Feb-15 Community Bank System Oneida Financial Corp
Inc
99 07-Jan-19 First Financial Corp HopFed Bancorp Inc
100 07-Jun-19 Columbia Financial Inc Stewardship Financial Corp
101 31-May-12 Berkshire Hills Bancorp Beacon Federal Bancorp Inc, East
Inc Syracuse, New York
102 14-Mar-18 HarborOne Bancorp Inc Coastway Bancorp Inc
103 27-Sep-14 Homestreet Inc Simplicity Bancorp Inc
104 30-Jan-17 Bryn Mawr Bank Corp Royal Bancshares of Pennsylvania Inc
105 15-Jun-11 FNB Corp,Pittsburgh, Parkvale Financial Corp
Pennsylvania
106 27-Sep-17 Old Line Bancshares Inc Bay Bancorp Inc
107 14-May-12 Park Sterling Corp, Citizens South Banking Corp,
Charlotte, NC Gastonia, North Carolina
108 04-Nov-14 Berkshire Hills Bancorp Hampden Bancorp Inc, Springfield,
Inc Massachusetts
109 16-Aug-19 ConnectOne Bancorp Inc Bancorp of New Jersey Inc
110 07-Feb-13 Renasant Corp First M&F Corp, Kosciusko,
Mississippi
111 22-Dec-10 Berkshire Hills Bancorp Legacy Bancorp Inc
Inc
112 13-May-13 First Merchants Corp CFS Bancorp Inc
113 10-Sep-13 Old National Bancorp Tower Financial Corporation
129
114 19-Feb-13 FNB Corp, Pittsburgh, PVF Capital Corp
Pennsylvania
115 10-Mar-16 Horizon Bancorp, LaPorte Bancorp Inc, Laporte, Indiana
Michigan City, Indiana
116 25-Oct-10 Community Bank System Wilber Corp
Inc
117 10-Feb-16 Hampton Roads Xenith Bankshares Inc
Bankshares Inc
118 15-Jul-19 Carolina Financial Corp Carolina Trust BancShares Inc
119 14-Aug-15 BNC Bancorp, High Point, Southcoast Financial Corp, Mount
North Carolina Pleasant, South Carolina
120 15-Jul-10 People's United Financial LSB Corp, North Andover,
Inc Massachusetts
121 10-Oct-13 Huntington Bancshares Camco Financial Corp
Inc, Columbus, Ohio
122 01-Oct-18 American National HomeTown Bankshares Corp
Bankshares Inc
123 11-Jul-18 City Holding Co, Poage Bankshares Inc
124 26-Oct-15 German American Bancorp River Valley Bancorp
Inc
130

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THE ANNOUNCEMENT EFFECT OF U.S. BANK MERGERS:

1.2. M&A Activity in The U.S. Banking Industry

1.3. Current U.S. Bank M&A Market Outlook

1.4. Research Description

Fig. 2.1. Event study time periods

2.1.2.4. Steps 7-8. Additional Analysis & Results Presentation

2.2. Regression Analysis Methodology

Fig. 3.1. Distribution of deal roles in the sample

Fig. 3.2. Acquirers sorted by acquisitions

Fig. 3.3. Distribution of interstate/intrastate mergers in the sample

3.2. Event Study Results

±3 days 0.0463953 0.1852586 0.0627 0.0000

( τ 1 , τ 2 ) =(−3 ,−1) 0.0003826 0.2179 0.8278

( τ 1 , τ 2 ) =(+1 ,+3) -0.0029715 -0.9185 0.3602

( τ 1 , τ 2 ) =(−3 ,−1) 0.0049174 1.1961 0.2339

( τ 1 , τ 2 ) =(+1 ,+3) 0.0811886*** 6.3731 0.0000

Fig. 3.6. The dynamics of target AARτ and CAAR(τ1, τ2)

-.15 -.1 -.05 0 .05 .1

Fig. 3.7. Box-whisker plot of the bidding banks’ CAR values

Fig. 3.8. Box-whisker plot of the logarithm of deal value

Table 16. Initial regression model for the acquiring banks

Fig. 3.9. Scatterplot of CAR and LOGVALUE variables

Fig. 3.10. Scatterplot of CAR and PERFA variables

Fig. 3.11. Scatterplot of CAR and RELSIZE variables

Fig. 3.12. Graph of the y=x −√ x function

Fig. 3.14. The box-whisker plot of the deal values

Fig. 3.15. Scatterplot of LOGVALUE and CAR varaibles

Fig. 3.16. Scatterplot of PERFT and CAR varaibles

Fig. 3.17. Scatterplot of RELSIZE and CAR variables

3.4. Managerial Implications

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