The determinants of target returns in European bank mergers

Announcement period abnormal returns for target banks are generally considered low compared to non-bank mergers. In this paper the factors that influence those returns in European bank mergers is examined. Sixty-seven deals from the EU, Norway and Switzerland are studied for which both targets and acquirers were listed companies (some of these being cross-border mergers and acquisitions), and find that European cross-border acquisitions tend to generate higher returns than national acquisitions. Cash deals and deals that are settled by a mix of cash, equity and loan notes create higher returns than equity transactions. It was also found that the target profitability and the relative asset growth rate have significant positive relation with the stock return. In addition, the significance of loan quality, the relative cost to income ratio and the ratio of loans to deposits, all point to the importance of efficiency in the European financial services industry.