Cross-Industry Product Diversification and Contagion in Risk and Return: The Case of Bank-Insurance and Insurance-Bank Takeovers

Abstract

We investigate the impact of domestic and international bank-insurance deals on the risk-return profiles of bidding banks, peer banks and peer insurers within a GARCH framework. We find that both announcing and non-announcing firms experience positive abnormal returns with the effect on insurer peers being larger and more gradual. These results establish the prevalence of intra- and inter-industry contagion and stand in contrast with studies documenting negative and/or insignificant results for bidders. Abnormal returns on bidder banks vary with leverage, relative size of the deal, growth opportunities, extent of bidder’s engagement in non-interest income activities, bidder-origin and bidder profitability. The overall risks of the bidders and peer firms decline following the bancassurance deals, with a larger component of the decline coming from idiosyncratic, rather than systematic risk. Risk and return contagion effects vary with the deal-size with larger deals demonstrating greater contagion. Our findings support the bancassurance phenomenon and the provision(s) of regulatory reforms, such as the Financial Services Modernization Act (1999).

Keywords: Cross-Industry, Bancassurance, Takeovers, Diversification, Spillovers, GARCH

JEL Classification: G21, G22, G32, G34