Abstract
PurposeBecause systemically important banks' takeovers in the US were expected to contain the 2008 global financial crisis (GFC) but were found to have imposed large cost on shareholders, this paper examines the effectiveness of these acquisitions during the GFC and investigates what went wrong with the market for corporate control of large banks.Design/methodology/approachThis paper presents a model of the disciplinary takeover based on the efficient market hypothesis which provides appropriate measures for it to examine the financial performance of acquiring banks after takeover.FindingsThe results indicate that the takeover market for large banks was ineffective in two aspects: the market did not distinguish strong banks from weak banks before the crisis and acquirers performed worse after takeover. Such ineffectiveness reflects the fundamental deficiencies of large bank takeovers arising from some key distinguishing characteristics of large banks.Research limitations/implicationsThe sample size of systemically important banks' takeovers is small so large-sample standard statistical inferences cannot be used.Practical implicationsThe deficiencies of large bank takeovers need to be rectified in order to aid in resolving future crises.Originality/valueThis paper provides rare and detailed insight based on case studies of large US bank takeovers during the GFC.
Highlights
In the US and UK market-based financial systems, takeovers perform as the market for corporate control because they transfer controls of weak firms to strong firms
Before the global financial crisis (GFC) started in the second half of 2007, the performance of target banks was close to that of acquiring banks in terms of both operating performance (ROE and ROA) and stock market performance (PER and Price/Book ratio (PBR))
Their PERs and PBRs were close to those of other banks in 2005 and 2006, indicating that the market did not realize the higher risk of these investment banks that could arise from their higher leverage
Summary
In the US and UK market-based financial systems, takeovers perform as the market for corporate control because they transfer controls of weak firms to strong firms. The paper analyzes the effectiveness of large bank takeovers in terms of both operating performance and stock market performance based on this model by investigating six private takeover deals of systematically important US banks during the GFC.
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