Are Bank Mergers Good News for Shareholders? The Effect of Bank Mergers on Shareholder Value in Japan

• Published date: 01 March 2020
• Author: Yuki Takahashi,Heather Montgomery
• DOI: http://doi.org/10.1111/irfi.12223
• Date: 01 March 2020

Are Bank Mergers Good News for

Shareholders? The Effect of Bank

Mergers on Shareholder Value

in Japan*

HEATHER MONTGOMERY

†

AND YUKI TAKAHASHI

‡

†

Department of Economics and Business, International Christian University, Tokyo,

Japan and

‡

Stockholm School of Economics, Stockholm, Sweden

ABSTRACT

This study investigates the effects of bank mergers on the welfare of affiliated

client firms. The findings demonstrate that, in general, bank mergers increase

the welfare of client firms. However, there are significant differences in the

impact of a bank merger on client firms across different merger, bank, and

firm characteristics. Client firms of banks involved in mega-mergers do not

enjoy an increase in welfare. Client firms of undercapitalized banks in fact

suffer significant welfare losses. In the long-run, weak “zombie”firms also in

many cases experience welfare losses following the announcement of a

merger by their main bank.

JEL Codes: G14; G21; G34; L14

Accepted: 2 July 2018

I. INTRODUCTION

This study investigates the effect of bank mergers in Japan on the client firms

of the merging banks. In particular, this study examines the welfare effects of

bank mergers on client firms, as measured by changes in shareholder value

around the announcement of a merger by the firm’s main bank. Financial inter-

mediation theory suggests that not all firms will be similarly affected by bank

mergers, so the analysis explores possible differences in the effects of mergers

on client firms across merger, bank, and borrower characteristics. Mergers are

categorized according to whether they are mega-mergers or not. Banks are clas-

sified as healthy or sick, the latter being those banks that are within 2 percent-

age points of the minimum required capital ratio. Differential effects for so-

called zombie firms, unprofitable firms that nevertheless continue to receive

forbearance lending from their main bank, are also considered. Finally, since

* This work was supported by JSPS KAKENHI grant number 26380398.

© 2018 International Review of Finance Ltd. 2018

International Review of Finance, 20:1, 2020: pp. 197–214

DOI: 10.1111/irfi.12223

the welfare effects of bank mergers on the merging banks client firms may vary

over time, the empirical methodology explores both short- and long-run

effects.

In view of the ongoing consolidation of the financial sector that is taking

place in many countries, it is important to understand the impact of bank

mergers on the banks’affiliated firms. However, despite its significance for

banking regulation and policy, the effects of this global trend toward more con-

solidated banks on the nonfinancial client firms of those banks are not well

understood. This research question may be particularly relevant in Japan,

where, in the wake of the decades-long nonperforming loan crisis and ongoing

changes to the banking market structure, policymakers now ponder whether to

encourage further consolidation of Japan’s banking sector.

Previous studies on the impact of bank mergers on the banks themselves

have generally found that bank mergers bring positive excess returns to share-

holders of the target bank (Cybo-Ottone and Murgia 2000; DeLong 2001; Hous-

ton et al. 2001; Campa and Hernando 2006; DeLong and DeYoung 2007). The

shareholders of the acquiring banks also benefit during periods of financial cri-

sis (Beltratti and Paladino 2013), in the case of mega-mergers (Kane 2000),

diversifying mergers (Filson and Olfati 2014), or when the target is in a low

investor protection environment (Hagendorff et al. 2008).

There is less in the literature about how bank merge rs affect the share-

holders of the merging banks’cl ient firms because data matching up banks to

their nonfinancial firm clients ar e not readily available. The few existing stud-

ies suggest that what is good for t he bank is not always good for the bo r-

rower. Two studies of mega-me rgers in Japan (Shin et al. 2003; Mi yajima and

Yafeh 2007) do not find evidence of an y significant welfare effects o f those

particular bank mergers on th e client firms. Researchers lo oking at bank

mergers in the US and Europe have g enerally reported welfare lo sses for

shareholders of client firms of the t arget bank, especially if the cli ent firm is

small or credit constraine d (Karceski et al. 2005; Car ow et al. 2006; Fraser

et al. 2011).

This study is the first comprehensive analysis of all bank mergers in Japan

over a 23-year period. The analysis to follow examines the effect of bank

mergers on the shareholder wealth of all listed nonfinancial firms. The compre-

hensive data set, which includes the full universe of announced bank mergers

over the sample period, reveals significant variation in the impact of different

kinds of mergers on the welfare of affiliated client firms. In addition, the analy-

sis explores possible differential effects on the client firms affiliated with the

merging banks across characteristics of the merging banks and the client firms

themselves.

This study makes several methodological contributions to the existing aca-

demic literature on the effect of bank mergers on client firms. Firstly, the full

sample of firms, including firms affiliated with banks that did not merge, is ana-

lyzed, rather than focusing on the subsample of firms affiliated with banks that

merged. This effectively isolates the effect of mergers on the merging banks’

© 2018 International Review of Finance Ltd. 2018198

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