CONSOLIDATION IN INDIAN FINANCIAL SECTOR: DOES IT MAKE THE SECTOR VULNERABLE TO FINANCIAL CONTAGION?

In the wake of continuously changing forces of globalisation and deregulation, the financial sector entities are increasingly involved in merger and acquisition. The present study attempts to evaluate the impact of type of merger and acquisition deal (such as geographical dimension i.e., domestic or cross-border; motive, i.e., regulatory or market driven; etc.) on the performance of financial entities in India. Specifically, the model specification enables separation of short, medium and long term effects. For this purpose, the post-merger and acquisition performance of acquiring firms is regressed on a set of independent variables using random effects panel data regression technique. The analysis reveals that there has been a deterioration of capital, liquidity and asset quality and increase in profits (not robust) and size (long run) of the acquirers. The decline in asset quality puts the financial system at the risks of financial contagion, calling for effective regulation.