Impact of Merger Announcements on Shareholders' Wealth: Evidence from Indian Private Sector Banks

Vikalpa: Journal for Decision Makers, Vol. 33, No. 1, pp. 35-54, January-March 2008

Posted: 30 Mar 2007 Last revised: 1 May 2020

See all articles by Manoj Anand

Manoj Anand

Management Development Institute

Jagandeep Singh

UIAMS, Panjab University, Chandigarh

Abstract

The study analyses five mergers in the Indian banking sector to capture the returns to shareholders as a result of the merger announcements using the event study methodology (Brown & Warner, 1980, 1985; and MacKinlay, 1997). These are merger of Times Bank with the HDFC Bank, Bank of Madura with the ICICI Bank, ICICI with the ICICI Bank, Global Trust Bank with the Oriental Bank of Commerce, and Bank of Punjab with the Centurion Bank. The Fama and Miller (1972) market model and Cox and Portes (1998) two-factor model form the theoretical framework of this study. The aim is to understand the shareholder wealth effects of bank mergers.

Using the single-factor model the study finds that the average cumulative abnormal return (CAR) of the bidder banks is positive and substantial. These results are statistically significant also. Thus, the bidder banks got significant positive abnormal returns.

The two-factor model results reveal that the merger announcement in the Indian private sector banks generated a positive and statistical significant CAR of 5.24%, 7.83% and 8.59% in a one-day, two-day, and three-day run-up window respectively to the shareholders of the bidder banks.

The single-factor model finds that the combined CAR for all target banks is positive, significant and substantial. The combined CAR has been propped up due to very high CAR registered by Bank of Madura.

The bidder banks created a wealth of Rs 4,117.98 million in a one day window (single-factor model) as a result of the merger announcements. In case of target banks, the shareholders of the Global Trust Bank and Bank of Punjab appear to be the losers as they lost Rs 382.55 million in a one day run up window (single-factor model) and Rs 128.74 million in a one-day window (single-factor model) respectively. Oriental Bank of Commerce and Global Trust Bank combined lost 14.78% in value on weighted average basis in a 11 days period (-5, 5) window. This merger was first major move to bail out sick bank.

The merger announcements in the Indian banking industry have positive and significant shareholder wealth effect both for bidder banks and target banks. The market value weighted CAR of the combined bank portfolio as a result of merger announcement is 4.29% in a three-day period (-1, 1) window and 9.71% in 11-days period (-5, 5) event window.

Keywords: Mergers, Indian Banking Sector, Shareholders' Wealth, Event Study

JEL Classification: G12, G21, G34

Suggested Citation

Anand, Manoj and Singh, Jagandeep, Impact of Merger Announcements on Shareholders' Wealth: Evidence from Indian Private Sector Banks. Vikalpa: Journal for Decision Makers, Vol. 33, No. 1, pp. 35-54, January-March 2008, Available at SSRN: https://ssrn.com/abstract=977119

Manoj Anand (Contact Author)

Management Development Institute ( email )

Gurugram, Haryana 122001
India

Jagandeep Singh

UIAMS, Panjab University, Chandigarh ( email )

No Address Available
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
4,902
PlumX Metrics