Does the Stock Market Compensate Banks for Diversifying into the Insurance Business?

Abstract

This paper explores a wide range of corporate restructurings, all available deals from wire services, in the banking and insurance sectors that led to bancassurance ventures. An event study methodology is employed to calculate excess returns on and around the deals’ announcement date. Using both univariate and multivariate analysis the paper finds bank driven mergers, deal's size and regional categorization all triggering positive and significant market reactions. Unlike the univariate framework, multivariate analysis shows that geographic focus and language are not significant factors. The results also indicate that markets are indifferent with respect to bank withdrawals from the bank‐insurance operations. Finally, Canadian, U.S. and European bank‐insurance deals produce positive results, while Australasian bidders offer statistically insignificant equity returns.

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

“…Our sample of deals includes 218 bank‐insurance deals and 54 bank‐securities deals listed on the Thomson One Banker M&A database between 1991 and 2012 . We create two subsets of the bank‐insurance sample because the literature on the interface between banks and insurance companies highlights significant differences in the risk‐return profiles of banks between combinations with insurance agencies/brokers and insurance firms (Boyd et al ., ; Dontis‐Charitos et al ., ; Nurullah and Staikouras, ). Failing to differentiate between deals when the target is an insurance underwriter – and exposed to underwriting risks – and deals where the target is an insurance agent/broker – where underwriting risk is not present – can bias results.…”

“…See Fiordelisi and Ricci () and Dontis‐Charitos et al . () for evidence on efficiency effects and shareholder value effects, respectively.…”

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

“…Similarly, some studies report positive market reactions around court rulings allowing U.S. banks to sell annuities (Carow, ) and in response to the Citicorp‐Travelers merger (Carow, ). In a survey study, Carow and Kane () conclude that the relaxation of long‐standing geographic/product line restrictions on the U.S. financial firms may have redistributed, rather than created, value; while Dontis‐Charitos, Molyneux, and Staikouras () and Fields, Fraser, and Kolari (, ) find positive abnormal returns for bank‐insurance announcements and Hagendorff, Collins, and Keasey () show that banks diversifying into other financial activities create value for shareholders under weak investor protection regimes in Europe.…”

“…Dontis‐Charitos, Molyneux, and Staikouras () find an insignificant relationship between domestic deals and abnormal returns, whereas, Fields, Fraser, and Kolari () report a positive relationship between a cross border dummy and abnormal returns. We expect a positive sign on DV‐U.S.…”

Bank Diversification and Overall Financial Strength: International Evidence

“…In general, these studies employ some kind of diversification measures as we do in our analysis. Others follow a more general approach and they examine differences in the risk profile between conglomerates and noncoglomerates (e.g., De Nicolo et al., ) or the stock market reaction of bank diversification into insurance business (e.g., Dontis‐Charitos et al., ).…”