Lessons from mergers and acquisitions of regional banks in Japan: What does the stock market think?

Abstract

Japanese regional banks are now facing an existential crisis. Their traditional business model has been devastated by the hollowing out of regional economies, technological change, declining populations and the rapid aging of Japan's non-urban areas. These banks must either go out of business or make significant changes. Reorganizations are a potential change that might solve the problem. Reorganizations include mergers and forming bank holding companies. This research examines regional bank reorganizations over the period from 2008 to 2019. It analyzes the stock market's response to announcements of bank reorganizations. A positive response is defined as stock price appreciation. It is a measure of the value that an efficient financial market attributes to the reorganization. This research finds that some kinds of reorganizations create more value than others. Specifically, mergers between banks within prefectures create more value. Yet, within prefecture mergers have the disadvantage that they might concentrate the provision of banking services in the hands of a few providers, leading to poorer services and higher fees. These reorganizations may violate competition law. Nevertheless, within-prefecture mergers may be a better overall solution to the regional bank crisis.