The authors generalize traditional event-study techniques to allow for event-induced parameter shifts, shifting variances, and firm-specific event periods. Their method, which nests traditional methods, also permits systematic risk to change gradually during the event period and exit the period at higher or lower levels. The authors use their approach to study 132 banks that acquired other institutions between 1989 and 1995. The authors find a significant change in the systematic risk of the acquiring firms, significant ARCH effects, and an event period that ends before the date of the announcement. None of these results is detectable using conventional methods. These results imply that (1) event studies that cannot account for information leakage may be biased, and (2) changes in systematic risk can occur in the absence of abnormal returns, and (3) regulators, investors and bank managers must evaluate each acquisition on its own merits; reliance on averages can mask important distinctions across acquisitions.
JEL classification: G14, G21, G34
Key words: event studies, mergers, acquisitions, banking
Preliminary and not for quotation without permission from the authors. DeGennaro acknowledges a University of Tennessee Professional Development Award and a Scholarly Activities and Research Incentive Fund Award. The authors thank Larry Lindsey and Nancy Page of the Board of Governors of the Federal Reserve System for providing part of the data. They also thank Joel Houston, Larry Lockwood, and Jeff Madura for helpful comments. The views expressed here are the authors’ and not necessarily those of the Federal Reserve Bank of Atlanta or the Federal Reserve System. Any remaining errors are the authors’ responsibility.
Please address questions regarding content to Ken B. Cyree, Department of Finance, University of Southern Mississippi, Hattiesburg, Mississippi 39406, 601-266-4627, firstname.lastname@example.org or Ramon P. DeGennaro, Visiting Scholar, Federal Reserve Bank of Atlanta; and Department of Finance, University of Tennessee, Knoxville, Tennessee 37996-0540, 865-974-1726, email@example.com.
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