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

In Table 6, we further examine the existence of information leaks and market efficiency immediately surrounding the announcement date. We use six additional dummy variables corresponding to three trading days preceding the events and three trading days following the events. We added the coefficient estimates for the dummies and their corresponding standard deviations over the three-day period to the results shown in Table 5. None of the coefficient estimates of the corresponding three-day dummies preceding the events is statistically significant, thus implying no information leaks before the announcements. The coefficient estimates of the dummy variables representing three-day periods following the announcements are also statistically insignificant, indicating market efficiency.

Summary and Conclusion

This paper investigates the impact of two bank merger announcements, and an official rejection announcement, on the share prices of Canada's eight largest banks. Our findings suggest that investors perceived the first merger announcement as a positive development. The intra-industry effects in the form of portfolio value increases are significant for all banks in our sample except the smallest. In contrast, investors did not equally welcome the second merger announcement, as evidenced by negative share returns for the merging banks. Perhaps Canadian investors realized that the probability of regulatory approval for both mergers was significantly diminished due to the second merger announcement. The Ministry of Finance blocked the two merger attempts. Apparently, the regulatory decision was anticipated by the investors in financial markets and incorporated into the banks' security pricing earlier, causing no further share return adjustments. However, the regulatory announcement did significantly reduce the average variance of share returns and the industry's systematic risk.

The main contribution of this study is to demonstrate the usefulness of event study evidence in discerning the underlying motive for specific merger proposals. In interpreting our findings, we focus on the question of which main benefits the market attributed to the mega-merger proposals we examine. Our conclusion is in line with the two hypotheses advanced by Kane (2000) in the banking mega-merger literature: that the motive of such mergers is to expand access to government safety net subsidies, and to enhance market power. However, because Canadian banks have historically enjoyed the benefits of government safety net subsidies, we find it unlikely to be the underlying motive for the merger proposals we study. This leaves us with enhancing market monopoly power as the most likely motive for the proposed mergers, a disturbing conclusion that is consistent with the rationale provided by Canadian regulators for rejecting the merger proposals.

Notes

1 The financial markets appear to have incorporated the rejection information before the official announcement was made. In November, Stephen Timewell of The Banker reported that according to a well respected banking analyst working for Nesbitt Burns, "financial markets believe the banks have only a 40% chance of getting the mergers approved, down from 70% earlier in the year." On December 4, Mark Heinzl of the Wall Street Journal reported, "A Toronto-Dominion Bank spokeswoman cast new doubt on prospects for Canada's planned giant bank mergers by saying that government officials are privately hinting they won't allow the deals to proceed . . . Canadian bank stocks fell by a few percentage points as part of a broader sell-off. Analysts said many investors have already decided the banks won't merge."