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

Abstract

This is the accepted version of the paper.This version of the publication may differ from the final published version. Permanent repository link Cross-Industry Product Diversification and Contagion in Risk and Return:The Case of Bank-Insurance and Insurance-Bank Takeovers ABSTRACTWe investigate the impact of domestic/international bancassurance deals on the risk-return profiles of announcing and non-announcing banks and insurers within a GARCH model. Bankinsurance deals produce intra-and inter-industry contagion in both risk and return, with larger deals producing greater contagion. Bidder banks and peers experience positive abnormal returns, with the effects on insurer peers being stronger than those on bank peers. Insurance-bank deals produce insignificant excess returns for bidder and peer insurers and positive valuations for peer banks. Following the deal, the bank bidders' idiosyncratic (systematic) risk falls (increases), while insurance bidders exhibit a lower systematic risk and maintain their idiosyncratic risk.

Diversification, Size and Risk: the Case of Bank Acquisitions of Nonbank Financial Firms

“…Chen and Tan (2011) examine changes in bidder total and systematic risk (beta) for 72 bank-insurance deals and confirm the result. 12 In contrast, Elyasiani et al (2015) investigate the risk-return and spillover effects of 82 bankinsurance deals and observe a decline in risk for bank acquirers and their peers. Whereas studies examine the relationship between measures of bank diversification and performance, and/or risk, the expected benefits of diversification for financial firms are not always evident, and when benefits accrue, they may be offset by other factors.…”

“…The results partially accord with Boyd et al (1993) and Lown et al (2000) who suggest that bank combinations with insurance firms are superior to combinations with securities firms in terms of affecting risk. One interpretation of the variation in results if we consider separately the pre-and post-2007 deals is that the crisis might have altered market perceptions on bank diversification (Elyasiani et al, 2015).…”

Insurer Growth Strategies

“…The authors also find that the value creation is even greater for firms that are more frequently involved in acquisitions. The prior literature also suggests that insurers acquiring banks do not experience an increase in value but do exhibit a lower level of systemic risk following the acquisition (Elyasiani et al., ). However, Shim () finds that acquiring firms exhibit reduced financial performance and greater earnings volatility during the gestation period following a merger.…”

Financial Conglomerate Identification by Financial Markets Regulators: Case of Developed and Emerging Market Economies

“…Despite the fact that the deep roots of the 2007 global economic crisis are still being dis-cussed, many researchers agree that it was the excessive diversification of banking activities in other sectors of the economy, together with the increase in the number of large, complex and interconnected financial conglomerates, that served as a catalyst for the systemic collapse scenario implementation. Therefore, the issue of effective regulation and supervision of systemically important financial institutions (SIFIs), is one of the central points in scientific discussions and regulatory initiatives (Beck & Casu, 2016;Elyasiani, Staikouras, & Dontis-Charitos, 2016).…”