The effect of mergers and acquisitions on the dividend policy of banks

  • M. A. Nnadi

    Student thesis: Doctoral ThesisDoctor of Philosophy


    The number of domestic and cross border bank mergers and acquisitions (M&A) has increased over the last decade with a resultant impact on the bank dividend. This study examines the effect of M&A on the dividend policy by comparing the abnormal returns, profitability and dividend policy of the domestic and cross border bank acquirers. The study focused on EU mega-bank mergers and acquisitions within 1997-2007 involving only commercial-to-commercial banks. The sample consists of a total of 62 mega-M&A with a minimum deal value of €500 million. Three hypotheses were formulated specifically to test: (i) the wealth effect and geographical diversification of the M&A between domestic and cross border acquirers; (ii) the effect on in the financial performance of both acquirers and (iii) the M&A impact on dividend policy on banks after bank M&A. Two strands of the literature were reviewed focusing on M&A and dividend policy. The event study methodology was used to calculate the abnormal returns of both the domestic and cross border acquirers which were standardised. A long window of 61 days was applied to capture a satisfactory length of pre and post merger events that could capture the behaviour of the abnormal returns and consequent effect on dividend policy. The hierarchical regression model was used to estimate the impact of the variables on the profitability and dividend policy of the acquirer banks. In comparison with the domestic acquirers, the cross border abnormal returns showed a trend of significant negative results following the M&A announcement. The domestic acquirers showed no significance but, on average have higher cumulative total standardised abnormal returns (CTSAR) than the cross border acquired banks. The result of the financial performance showed that CTSAR of the cross border acquirers is significantly affected by the profitability of the banks but insignificant with domestic acquirers. However, the cost-to –income ratio (CIR) significantly affects the performance of both bank acquirers. CIR and RISK (measured by the ratio of the loan provision to net interest revenue of the banks) highly correlated with profitability of both the domestic and cross border acquirers. The management of costs and loans risks were found to be significant variables in the achievement of profitability among domestic acquirers. The dividend policy hypothesis result indicated that CTSAR has a weak correlation and insignificant effect on the dividend policy variables. Infact, the Causality test result confirmed that the CTSAR does not Granger cause dividend policy. However, the study provides strong support to previous studies that beta, liquidity, taxes, and the finance structure of the acquirers are significant variables in the formulation of the dividend policy of the merged banks. The beta, which a proxy for risk, is the most significant factor affecting the dividend policy of the merged banks.
    Date of Award2010
    Original languageEnglish
    Awarding Institution
    • Coventry University
    SponsorsChartered Institute of Taxation
    SupervisorSailesh Tanna (Supervisor)


    • bank mergers
    • corporate dividend policy
    • acquisitions

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