An Examination of the Equity Market Response to The Gramm‐Leach‐Bliley Act Across Commercial Banking, Investment Banking, and Insurance Firms

Abstract

This paper examines the wealth effects of the events surrounding the passage of the Gramm-Leach-Bliley Act of 1999 and changes in systematic risk from the pre-Act period to the post-Act period for commercial banks, investment banks, and insurance firms. The results suggest that investment banks and insurance firms are better positioned to exploit the benefits of product-line diversification opportunities allowed by the legislation compared to commercial banks that experience no significant market reaction. Further evidence indicates a significant risk shift and overall reduction in riskiness for the financial sectors under consideration around the event period. Copyright 2006 The Authors Journal compilation (c) 2006 Blackwell Publishing Ltd.

Cross‐Industry Product Diversification and Contagion in Risk and Return: The case of Bank‐Insurance and Insurance‐Bank Takeovers

“…The separation of the sample into pre‐2007 and post‐2007 deals (Panels B and C), reveals that any positive and significant wealth effects are confined to the pre‐2007 period, with post‐2007 bank‐insurance deals producing insignificant returns. Our pre‐2007 results are indirectly comparable with studies examining the reactions of banks/insurers to court rulings allowing banks to enter insurance brokerage and/or underwriting (Carow, ), the passage of the FSMA (1999) (Yildirim, Kwag, and Collins, ) and the Citicorp‐Travelers merger (Carow, ) . It appears that the financial crisis changed investor perceptions regarding bank diversification into insurance.…”

The oil industry's response to new avenues in futures trading

“…We employ a Multivariate Regression Model (MVRM) to examine the stock price reactions to the event dates following Yildirim et al (2006) and Bhargava and Fraser (1998). The MVRM corrects for likely heteroscedasticity biases that arise when common event periods likely produce individual asset returns that will be contemporaneously correlated such that residuals across the various firm type portfolios will not be identically and independently distributed.…”

Do insurance activities enhance the performance of financial services holding companies?

“…Kwan and Laderman (1999) argue that securities activities, insurance agency activities and insurance underwriting business are all riskier and more profitable than banking activities. However, financial consolidation across activities is found to be accompanied with potential lowering of the portfolio risk and reduced likelihood of financial firm failure (Berger et al, 1999;Mishkin, 1999;Yildirim et al, 2006). Decreases in firm values resulting from diversification may derive from inefficient investment, overinvestment, cross-subsidization and increased bureaucracy due to greater organizational complexity (Berger and Ofek, 1995;Rajan et al, 2000;Lamont and Polk, 2002).…”

“…They suggest that these gains can be due to economies of scope, greater market power and/or an implicit extension of government guarantees to the nonbank affiliates. Yildirim et al (2006) report a significant shift in the mix and an overall reduction in risk for the financial sector around the time of the passage of the GLBA (1999). Both of the latter two studies find that the abnormal stock returns engendered in response to the passage of the GLBA were positive and significant for investment banks and insurance companies but insignificant for banks.…”