benefits of banking mega-mergers: Event study evidence from the 1998 failed mega-merger attempts in Canada, The

Furthermore, we orthogonalize the unexpected percentage change in interest rates by regressing them over the market index, used the resulting residuals to find the percentage changes in the series, and use the changes as the variable in the equation system above.6

After considering several Canadian Treasury bills and bonds with different maturities for use in the control part of our market model, we decided on the three-year Canadian Treasury bond rate. Unlike the other Treasury securities we examined, this bond rate correlates positively with the other Treasury security rates over the three-event period, 11 September 1997 to 23 April 1999.7 Our use of the three-year Treasury bond rate is consistent with Saunders and Smirlock's (1987) use of the three-year U.S. Treasury bond rate in a market model to analyze the intra-industry effects of BankAmerica Corporation's takeover of Charles Schwab.

Two forms of information transfer can be captured by this study: the effects of a merger announcement on the banks' earnings or portfolio value ([gamma]^sub i^), and the announcement's effects on the banking industry's uncertainty or systematic risk ([lambda]^sub i^). If the merger and regulatory announcements were to result in lower profitability for the industry, we would expect to find [gamma]^sub i^ 0. On the other hand, higher profitability and lower systematic risk would make [gamma]^sub i^ > 0 and [lambda]^sub i^ 0.

Empirical Results

The empirical findings from the SUR equation system are reported in Tables 2 and 3. Table 2 presents the coefficient estimates for the contemporaneous, lagged, and lead variables representing the TSE 300 index returns and the orthogonalized unexpected interest rates. The summation of the contemporaneous, lagged, and lead variable coefficients provides the overall systematic risk measure for the banks. On average, the systematic risk factor for the majority of firms is greater than 1. Only two smaller banks, Laurentian and Canadian Western, provide exceptions.

Table 3 reports the event study parameter estimates for the three events. Our empirical findings suggest that at Event 1 (the day of the Royal Bank and Bank of Montreal merger announcement), the industry realised portfolio value gains ranging from 3% to 16% of their common share returns. The Canadian Western Bank, the smallest bank in the sample, was an exception to the overall trend. In addition, the systematic risk factor coefficient estimates provide mixed results, showing a decrease in the case of Bank of Montreal and an increase for Bank of Nova Scotia, while leaving the other banks unaffected.

As discussed earlier, the rise in the merger partners' share prices is consistent with Kane's (2000) contention that merging partners of large domestic bank deals benefit from anticipated increases in market power. In addition, the rise in the share prices of rival banks is consistent with the idea that rival banks benefit from the anticipated price effects of increases in industry concentration (Eckbo, 1983).