Bank Diversification and Future Stock Price Performance: Evidence from Post-Acquisition Returns after the GLBA

Abstract

Shareholder optimism around the announcement of the GLBA seems to be at odds with recent findings that imply that the GLBA cannot be justified on the grounds of risk reduction or increased returns. Using banks’ acquisition of other banks, investment banks, and insurance companies as a measure of diversification, we find that banks that acquire investment banks and insurance companies earn 97 and 83 basis points higher annualized average risk-adjusted return than those that acquire other banks. Thus, the GLBA seems justifiable on grounds of risk-adjusted returns. Both acquirers’ announcement-day abnormal returns and the acquisition premium increase with diversification, suggesting that investors and the market for corporate control correctly perceive, at the time of the announcement or acquisition, the benefit of diversification.