Abnormal Returns in the Acquisition Market: The Case of Bank Holding Companies, 1990±1993

Recent evidence suggests that announcements of bank holding company acquisitions result in wealth transfers from the bidding to target shareholders. Empirically, this is demonstrated through ®ndings of negative average abnormal returns to bank holding company acquirers and positive average abnormal returns to targets on announcement. Using a sample of acquisitions from the early 1990sÐa period marked by the removal of signi®cant geographic entry barriersÐthis paper reexamines the issue by applying a general statistical model to the event study framework to more precisely measure abnormal returns. In particular, we model returns according to the GARCH process to control for time-varying volatility. With respect to the unconditional distributions of acquirer and target abnormal returns, our ®ndings are consistent with prior research. Further investigation into the conditional distribution of acquirer returns ®nds that, on announcement, interstate acquisitions using the purchase method of accounting actually increased shareholder wealth for acquirers (on average) by 1.44%. However, over a longer event horizon, the most important determinants of acquirer abnormal returns appear to be the relative size of the transaction and the method of accounting.