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It expands the literature on cross-border acquisitions b

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Title: It expands the literature on cross-border acquisitions b


1
Cross-border Bank Acquisitions Is there a
Performance Effect?
  • By Ricardo Correa
  • Discussant Elijah Brewer III, DePaul University
    and the Federal Reserve Bank of Chicago

2
Outline
  • Why I like the paper?
  • Summary of setup
  • Big picture questions
  • Results
  • Suggestions/clarifications probit specification
  • Suggestions/clarifications difference-in-differe
    nce tests
  • Assessment

3
Why I like this paper
  • The paper combines two strands of the banking
    literature
  • It expands the literature on cross-border
    acquisitions by analyzing both the determinants
    of financial foreign direct investment at the
    country level and the target specific
    characteristics that motivate cross-border
    acquisitions.
  • It extends the operating performance analysis
    used to analyze performance effects post domestic
    MA acquisitions to a sample of deals that
    include targets in developed and emerging
    economies.

4
Summary of setups
  • Probit specification to estimate the factors that
    distinguish banking organizations that have been
    targets of cross-border bids from those that have
    not using data from mid-1990s to the early 2000s.
    The dependent variable is equal to one, the year
    a firm is the target of a bid from a foreign
    financial institution, zero otherwise.
  • Univariate tests are conducted for several
    measures of performance
  • Comparing performance two-years before relative
    to two-years after merger.
  • An equation to estimate the effects of economic
    integration and information costs on a targets
    performance post-cross-border acquisition

5
BIG questions
  • Which factors influence cross-border
    acquisitions?
  • Do cross-border acquisitions improve the targets
    performance?
  • What factors can explain the change, if any, in
    performance?

6
Results
  • First question
  • The discrete choice estimates show that banking
    organizations are more likely to get acquired in
    cross-border deals if they are relative large,
    poor performers, located in a small country, and
    when the banking sector is more concentrated.
  • Second question
  • Post-acquisition performance for target banking
    organizations does not improve in the first two
    years relative to domestically-owned financial
    institutions. In fact, the multivariate
    regression shows that performance declines over
    the first several years after the acquisition by
    a foreign entity.

7
Suggestions, Clarificationsprobit specification
(1)
  • Average performance measures over a longer
    horizon to smooth out short-run fluctuations in
    these measures that may not have anything to do
    with the long run performance of the firms.
  • A risk measure
  • Variability of ROA or ROE
  • RWA/TA
  • Cross-border deals might be motivated by the
    desire to gain access to a banking
    organizations retail operations. Why not control
    for this possibility by including the ratio of
    retail deposits to total deposits in the
    specification?
  • Number of foreign banking organizations or
    banking organizations that are owned by foreign
    banks in the banks market area. Are you more
    likely to be a target if there are other banking
    organizations in your market that are foreign
    owned?
  • Is a banking organization more likely to be a
    target if it has a foreign operation?

8
Suggestions, Clarificationsprobit specification
(2)
  • Are firms in a country more likely to be targets
    of cross-border deals if the currency of the
    country is relatively weak? A country-fixed
    effect?
  • Did you review the history of non-acquirers to
    identify firms whose objective function may
    include elements other than maximizing the value
    of the banking organizations to their
    shareholders? In particular, did you exclude
    organizations in any year in which they are
    government owned or owned as a part of a
    cooperative?

9
Suggestions, Clarifications probit specification
(3)
  • To capture the importance of non-interest income,
    It might be useful to make use of
  • The ratio of non-interest income to net interest
    income plus non-interest income
  • In addition, recent studies seem to suggest that
    banking organizations have been shifting within
    non-interest income between traditional and
    non-traditional sources of non-interest revenue.
    So, why not use the following decomposition of
    non-interest income
  • Traditional fee-based revenue
  • is income from fiduciary activities plus service
    charges on deposit accounts.
  • Nontraditional sources of non-interest revenue
  • all other non-interest revenue (e.g., income from
    underwriting corporate debt and equity
    securities, selling and underwriting various
    forms of insurance, etc).

10
Suggestions, Clarificationsprobit specification
(4)
  • What does the concentration measure actually tell
    us?
  • In four countries (France, Germany, Spain, and
    the United States) that account for 20 percent
    of the deals and 37 percent of the observations
    the cross-country average three-bank
    concentration ratio is likely to be very low and
    not quite representative of the actual
    concentration in the countries. According to one
    study using data for the period 1989 to 1996 the
    cross-country average three-bank concentration
    ratio was 0.26. For countries like the United
    States the three-bank concentration ratio does
    not reflect the extent of competition in a
    banking market in which a particular firm
    operates. The importance of this is likely to
    vary with size of country.
  • What does the Heritage Freedom measure and how is
    it expected to influence the probability that a
    firm will be target of a bid from a foreign
    entity? You need to discuss this and point out
    the limitation of this index.

11
Suggestions, Clarificationsprobit specification
(5)
  • Room for greater interpretation of the
    coefficients. For example
  • The Market CAP/GDP variable is included as a
    measure of the importance and market power of the
    banking system in the economy.
  • Correa claims that a more developed equity market
    competes with the banking sector in the
    allocation of resources, reducing market power
    and makes entry less attractive for MNBs. An
    alternative hypothesis is that more competition
    primarily from capital markets may make for
    greater efficiencies and higher profits, making
    entry more attractive. A discussion a long these
    lines would fill out the paper nicely.

12
Suggestions, Clarificationsprobit specification
(6)
  • Econometric issues
  • Do non-acquirers appear multiple times? If so,
    do you have panel data problems that Petersen
    (2007) discusses in Estimating Standard Errors
    in Finance Panel Data Sets Comparing
    Approaches.
  • Are the factors influencing cross-border mergers
    constant over time? The number of deals seem to
    peak in 2000, declining thereafter.

13
Suggestions, Clarifications difference-in-differen
ce tests (1)
  • Control sample issues
  • Does the control sample include banking
    organizations that are undergoing some domestic
    restructuring that could make it a less than
    perfect control for overall changes in the
    banking activity at the country level?
  • If there is a problem with the control sample,
    this could not only influence the
    difference-in-difference tests but it could
    influence the performance and economic
    integration tests that are performed latter on in
    the paper.
  • I suggest that Correa try several other
    country-level indices
  • One for those firms within the country that are
    involved in domestic mergers.
  • Another for those firms within the country that
    are not involved in any type of merger
    activities.

14
Suggestions, Clarifications difference-in-differen
ce tests (2)
  • Compares performance of the standalone entity
    over the two year period before the merger with
    the entity that is a subsidiary of the acquirer
    over the two year period after the merger. Are we
    comparing apples and oranges here?

15
Assessment
  • Correa have considered two BIG picture questions
  • Which factors influence cross-border
    acquisitions?
  • Do cross-border acquisitions improve the targets
    performance?
  • Uses deals in both emerging markets and developed
    countries. Provides a nice addition to the
    literature.
  • Spending a little more time on the RHS variables
    in the probit regression seems worthwhile.
  • Developing appropriate benchmarks to compare
    banking organizations performance before and
    after cross-border acquisitions.
  • Correa has already found some very interesting
    correlations in the data and I have no doubt
    there is much to learn from considering these two
    BIG picture questions.
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