Similarly the estimation period is used to estimate the expected returns of the

Similarly the estimation period is used to estimate

This preview shows page 6 - 8 out of 20 pages.

Similarly the estimation period is used to estimate the expected returns of the stocks. Typically, the period needs to be long enough to create a representative measure of returns but too long and estimation period can risk biasing the estimation with information from other events or 3Global Trust Bank was one of the leading private sector banks in India. Owing to prolong financial debt, the company merged its operation with Oriental Bank of Commerce in 2004. The fall of the banking entity began in the early 2000s. The Reserve Bank of India’s (RBI) probe revealed irregular financial disclosures As Global Trust Bank collapsed; RBI announced its merger with the Oriental Bank of Commerce (OBC). The bank took all the assets and liabilities of GTB, along with its 104 branches, 275 ATMs and a workforce of over 1400 employees. However, according to the merger deal, GTB’s shareholders would not get OBC shares. OBC benefited hugely, as its network and customer base expanded. It also earned tax benefits due to GTB’s large amount of investment in non-performing assets (NPAs). The deal was equally beneficial for GTB depositors, as they could now enjoy the trust of a public sector bank. However, the Global Trust Bank saga created an environment of suspicion against private sector banks. This became one of the reasons for the immense success of public sector banks in India.Figure 1:Event Window and Clean Estimation PeriodNotes:Estimation window in this study comprise of 240 days prior to event date and event window comprises of three, five and eleven days for quantifying the abnormal returns)Bank Mergers And Shareholder Value Creation In India
Background image
251changes in the firms general condition. It is normally set at around a year of trading prior tothe event window. But the choice of the estimation period is arbitrary. Brown and Warner (1980) have used 35 months as the estimation period, while Renneboog (2006) used 240 days. In this paper it is set to 240 trading days prior to the event date and the eleven days event window are kept separate from the estimation period. This is done to make sure that the normal returns don’t get influenced by event related returns. 5. METHODOLOGYThe present work has been carried out as an event study project. According to Serra (1999), event studies start with the hypothesis about how a particular event affects the value of a firm. The hypothesis that the value of the company has changed will then be translated inthe stock showing an abnormal return. The logic behind the event study methodology (within the specific context of mergers) is explained in Warren-Boulton and Dalkir (2001): Investors in financial markets bet their dollars on whether a merger will raise or lower prices. A merger that raises market prices will benefit both the merging parties and their rivals and thus raise the prices for all their shares. Conversely, the financial community may expect the efficiencies from the merger to be sufficiently large to drive down prices. In this case, the share values of
Background image
Image of page 8

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture