"Wealth effects of tradable securities in pure stock-for-stock mergers" : evidence from large bank mergers

This paper examines the effect of mergers on the publicly traded debt and equity securities of 20 acquirer banks and 23 target banks participating in mergers over a three year period from 1994 through 1996. Using a valuation prediction error methodology to compute abnormal returns, I examine the wealth effects of mergers on the preferred stock, common stock, and corporate debt securities of the merging banks. Results document the presence of significantly positive abnormal returns to the bondholders of the target and acquirer banks thus supporting coinsurance of debt theory. Returns to the common stock of the target bank and to the combined sample are positive and insignificant and returns to the acquirer banks are negative and insignificant. Returns to the preferred stock of the target bank, the acquirer bank, and the combined sample are positive and insignificant. Results document positive and significant net synergistic gains to the combined security sample (synergy hypothesis). Results do not indicate any wealth redistribution between the security classes.