The Wealth Effect of Forced Bank Mergers and Cronyism By Chong, Beng Soon* Liu, Ming-Hua** Tan, Kok-Hui* Current Versión: October 2005 JEL Classification: G21, G34, G38 Keywords: Bank mergers, industry consolidation, cronyism, politically- connected firms. * Nanyang Business School, Nanyang Technological University, Singapore. ** Faculty of Business, Auckland University of Technology, New Zealand Please direct all correspondences to Kok-Hui Tan: S3-01C-99, Nanyang Business School, Nanyang Technological University, Nanyang Avenue, Singapore 639798. Tel: (65) 6790-4660, Fax: (65) 6791-3697, e-mail:
[email protected] . The Wealth Effect of Forced Bank Mergers and Cronyism Abstract This study examines the impact of forced bank mergers on the shareholders’ wealth of Malaysian banks. Forced bank mergers, which are the result of direct government intervention in the consolidation of the banking industry, are generally rare. Unlike the findings on voluntary mergers and acquisitions, our study shows that the forced merger scheme destroys economic value in aggregate and the acquiring banks tend to gain at the expense of the target banks. Further analysis shows that the contrasting forced merger finding is linked to cronyism. 1. Introduction The regulatory authority in Malaysia had repeatedly encouraged banks in Malaysia to merge with each other, but after years of moral persuasion with little success, the Malaysian government took the unprecedented measure of forcing banks to merge with each other in 1999. While there have been many studies on voluntary bank mergers and acquisitions, none has examined forced mergers and acquisitions due to their rarity. The case of Malaysia’s merger scheme, therefore, offers an opportunity to assess the extent of the economic benefit of government interventions in the financial market.