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- Title
Market Misreaction? Leverage and Mergers and Acquisitions.
- Authors
Krishnan, C. N. V.; Yakimenko, Vasiliy
- Abstract
Using a large database of U.S. mergers and acquisitions (M&As) announced from 2010 through 2017, we examine the effects of capital ratio (leverage) on the announcement period stock price reaction as well as on longer-term stock returns and performance, for banks, making comparisons with non-banks. We compare announcement period reactions (computed in different ways) for lower (lower than sample median) capitalized banks and non-banks with that for higher capitalized banks and non-banks. We confirm our results using multivariate analyses—after controlling for year and industry fixed effects—and we check the associations of capital ratio with announcement period abnormal returns, longer-term performance, as well as certain bank-specific and non-bank specific performance measures. For banks, we find that a lower capital ratio of acquirers at the time of the announcement of the M&A is significantly associated with negative announcement period abnormal returns. However, for these banks, the longer-run abnormal returns and performance are positive. The opposite is true for non-bank M&A announcements: higher equity ratios (lower leverage) of acquirers as at the time of the announcement is significantly associated with negative announcement period abnormal returns. Yet, for such non-banks, the longer-run abnormal returns and performance are positive. This shows that the market may misreact, on average, to both bank and non-bank M&A announcements based on the acquirer's leverage at the time of the announcement.
- Subjects
BANK mergers; ABNORMAL returns; MEDIAN (Mathematics); STOCK prices; NONBANK financial institutions; MULTIVARIATE analysis
- Publication
Journal of Risk & Financial Management, 2022, Vol 15, Issue 3, p144
- ISSN
1911-8066
- Publication type
Article
- DOI
10.3390/jrfm15030144