Market reaction to bank merger and acquisition events in Brazil: an analysis of the effects of market waves

Abstract

The aim of this study is to investigate the stock market’s reaction to bank merger and acquisition (M&A) events in Brazil when the market is heated. This article aims to fill the research gap involving bank M&As and their effects, especially those arising from M&A waves. This field remains open in the literature; there is no consensus as to the abnormal returns the investor can expect from this mechanism. The notion that bank M&A markets heat up is discussed and still does not present a consensus in the literature. Therefore, topics that involve research on specific M&A strategies and their effects are interesting for the literature. The results of this research point to the emergence of positive cumulative abnormal returns for rivals of newly-merged acquiring banks and zero ones for acquired banks. This analysis occurs because in heated markets the probability of rival banks becoming involved in M&As increases, leading to market gains and greater market power for acquiring banks and the rapid pricing of acquired bank assets. This result corroborates with the post-merger analysis, in which the accounting performance indicators of the acquiring banks are positive. The market reaction was verified through the use of the event study econometric technique, which was applied in the investigation of the occurrence of abnormal returns in time windows of up to 41 days around the bank M&A events. The study measured the stock market’s reaction to a motivation for M&As, which is the effect of M&A waves. This article contributes to the literature by highlighting specific forms of bank M&As. In particular, the logic of merger by market forces is addressed. This mechanism of mergers by market forces is presented as evidence of the tendency for M&As and not of paid-in earnings.

Does Bank Recapitalization Affect the Performance of the Banking Sector? The Empirical Evidence

“…Similarly, this study has empirically investigated the effect of merger and acquisition on bank performance and found that mergers and acquisitions have a significant positive effect on the bank performance. These results are in agreement with the discourse of several studies that have also explored the effect of merger and acquisition on the bank performance (Abdulazeez et al, 2016;Arena & Dewally, 2017;Christine & Jagongo, 2018;Souza & Gartner, 2019). This also confirms that, the study's position and prior argument raised by Hassen et al (2018) that in the long run merger and acquisition achieve all their aims.…”

“…However it yet remains unclear, because of mixed results from empirical studies (Lebedev et al, 2015). Souza and Gartner (2019) reported that in the most recent times, the global economy, particularly in the banking sector, has realized an increase in the incidence of mergers and acquisitions. Some researchers argued that cross-border investment could lead to the inflows of capital and do not only bring in the needed capital but have positive implications on productivity and investment that can improve the host country's business performance (Miozzo et al, 2016).…”

“…Meanwhile, Souza and Gartner (2019) reported that there is a significant positive relationship between mergers and acquisitions and bank performance because banks involved in merger and acquisition leading to market gains and greater market power for acquiring banks and increases abnormal returns for newly merged acquiring bank. Furthermore, many previous researchers have conducted the empirical analysis on the relationship of merger and acquisition and bank's performance, and they found merger and acquisition have significantly and positively improved bank performance (Shanmugam & Nair, 2004;Kiliç, 2011;Meghouar & Sbai, 2013;Joash & Njangiru, 2015;Patel, 2018).…”