Year Published
2003
Abstract
This study examines the issue of whether CRA-related events impact the security
prices of banking institutions involved in mergers. While previous research has
established that bank shareholders experience a significant permanent loss of wealth upon
the announcement of a CRA protest, the current research finds no such evidence for
either CRA protests or the removal of CRA protests using a sample of banks involved in
mergers between 1986 and 1998. We identify a key econometric issue associated with
event studies – the choice of a reference point for determining a bank’s baseline security
price dynamics – as the driving factor in the divergence of the results. We argue that the
choice of a reference point should ideally cause the effects of other events that have an
independent influence on security price movements to be excluded from the analysis,
which is the method employed in the current research. Supplemental analyses using a
cross-sectional model of cumulative abnormal returns provide evidence that the market
responds to CRA-related events, although the evidence does not generally support the
view that such events have had large and significant negative impacts on bank stock
prices.
prices of banking institutions involved in mergers. While previous research has
established that bank shareholders experience a significant permanent loss of wealth upon
the announcement of a CRA protest, the current research finds no such evidence for
either CRA protests or the removal of CRA protests using a sample of banks involved in
mergers between 1986 and 1998. We identify a key econometric issue associated with
event studies – the choice of a reference point for determining a bank’s baseline security
price dynamics – as the driving factor in the divergence of the results. We argue that the
choice of a reference point should ideally cause the effects of other events that have an
independent influence on security price movements to be excluded from the analysis,
which is the method employed in the current research. Supplemental analyses using a
cross-sectional model of cumulative abnormal returns provide evidence that the market
responds to CRA-related events, although the evidence does not generally support the
view that such events have had large and significant negative impacts on bank stock
prices.
Research Category
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