The stock market reaction to cross-border acquisitions of financial services firms: an analysis of Canadian banks

Abstract In 1998, two pairs of the largest Canadian banks proposed combining their activities in order to become internationally more competitive. The Canadian government's disapproval of these mergers prevented the banks from growing through consolidation within the domestic banking industry. Subsequently, between January 1998 and June 2001, Canadian banks engaged in 26 cross-border and 17 domestic acquisitions of other financial services firms. In this paper, we investigate the stock market reactions to these merger announcements. Our findings indicate that foreign acquisitions in the wealth management and retail banking sectors created value, while foreign acquisitions in the insurance sector did not. The opposite was true of domestic acquisitions. This result raises questions about the effect of the initial regulatory decision for the efficiency of the Canadian financial system.

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