Investors’ reaction to bank consolidation in India – A study of 10 bank mergers

The paper analyzes the abnormal response of bank equity investors to consolidation announcements. The results suggest that the reaction is not indiscriminate across the banks for the shorter event windows. The paper determines if the variation in the abnormal response depends on the bank's characteristics, including bank's profitability, bank's size, bank's financial health (Non-Performing Assets), and whether the merger banks are anchor banks. The research design follows an event study methodology to find the banks’ cumulative abnormal equity returns, i.e., cumulatively adding the returns (over the various event windows) over and above the expected returns determined through a market model. The results suggest that stock market response of merging banks with relatively lower NPAs respond more negatively to the information of bank consolidation as compared to higher NPAs merging banks. The results also find that smaller consolidating banks and the target banks (non-anchor banks) respond more positively as compared to the larger banks to the merging news, suggesting a perceived benefit from the merger. The results provide useful insights into bank mergers’ perceived benefits measured through the stock market abnormal reaction, and its relationship with the bank characteristics.