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Asymmetric Information During Merger: A Case of SBI

CASE STUDY, BANKING & FINANCIAL SERVICES
Indian Institute of Technology Kharagpur, 12 Pages
AUTHOR(S) : Aritra Pan and Dr. Arun Kumar Misra, Vinod Gupta School of Management, Indian Institute of Technology Kharagpur, India

Case Preview

Asymmetric Information During Merger: A Case of SBI

 

State Bank of India is an Indian Multinational, Public Sector Banking firm. It is the largest bank in India which is government-owned, with its headquarters in Mumbai, Maharashtra. On April 1st 2017, State Bank of India (SBI) took over its five Associate Banks (State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Mysore, State Bank of Patiala and State Bank of Travancore) and Bharatiya Mahila Bank. This is the first-ever large scale consolidation in the Indian Banking Industry. As per SBI website, with this merger, SBI would enter the league of top 50 global banks with a balance sheet size of INR41 trillion with 2,77,000 employees, 500 million customers, and more than 22,500 branches and 58,000 ATMs. As mentioned in SBI website, it has 198 offices in 37 countries and 301 correspondents in 72 countries. The company is ranked 232 on the Fortune Global 500 list (4th among Indian companies) of the world’s biggest corporations as of 2016. SBI has 20% market share in deposits and loans among Indian commercial banks.

SBI was established during the British India, as the Imperial Bank of India in 1806, through the amalgamation of three “Presidency Banks”, which in turn became the State Bank of India in 1955. The associate banks of SBI originated in different states under British control.............

Exhibits

Exhibit I: Shareholding (%)

Exhibit II: Comparison of FY15 and FY16 in INR Cr

Exhibit III: Investor Composition as on March 31st 2016

Exhibit IV: SBI Share Price & Nifty50 Price

Exhibit V: SBI Share Volume& Nifty50 Volume Movement

Exhibit VI: SBI Share Trading Frequency

Exhibit VII: Asymmetry Information Cost: June 16th – August 31st, 2016

Exhibit VIII: Co-movement of Asymmetry Information and Share Price - SBI

Exhibit IX: Co-movement of Asymmetry Information and Traded Volume - SBI

Exhibit X: Co-movement of Asymmetry Information and Daily Return

Exhibit XI: Correlation Tests Period: June 16th – August 31st, 2016

Exhibit XII: Pooled Data Time Series Analysis Period: June 16th 2016 – August 31st 2016

Teaching Note Preview

Asymmetric Information During Merger: A Case of SBI

 

Synopsis

This case study analyzes the impact of information asymmetry during mergers and acquisitions on company’s stock prices. It can be used as a hybrid extension to mergers and acquisitions. The case also demonstrates an understanding of trading strategy under unique market conditions. It also highlights major aspects of high-frequency trading strategy. This will inspire students to come up with broader level of analysis in stock market to explore different trading strategies.

Case Positioning and Setting

This case study can be used in MBA or Executive MBA courses to understand the following concepts:

• Mergers and Acquisitions
• Financial Markets
• High Frequency Trading and Analytics

Expected Learning Outcomes

• Compute asymmetric information cost
• Understand the importance of having different levels of information amongst traders
• Analyze the impact of asymmetric information cost on market parameters like trading volume, share price, etc.

Assignment Questions

I. Do you think deals like mergers and acquisitions have any impact on stock market activities? Why?
II. How can you quantify different levels of information amongst traders to understand market behavior in case of events like mergers?
III.......

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Abstract

This case study on asymmetric information during merger of SBI and its associates enables readers to understand the importance of different levels of information amongst traders and its impact on market parameters like share trading volume and price. The merger of associate banks of SBI with its parent bank was in news since the beginning of the financial year 2016-17. The associate banks were originated during the India’s independence era and remained as leading associate banks of SBI where the parent bank contributed significantly to their capital and growth. The news of merger was looked upon by traders and investors in different perspectives. Some of them viewed the merger as creation of a giant bank with market share of more than 25% of banking assets. Few have considered this merger as a bail-out of weak subsidiaries. These divergent views on merger led investors to either invest or liquidate their positions. The merger has created challenges and opportunities for SBI. Challenges in the form of absorption of culturally different associate banks in its fold and management of capital of the giant bank. Opportunities for SBI are to control the market and expand its business further.

Consolidation of SBI has given rise to divergent views amongst the investors which also created a large amount of information asymmetry amongst traders. Though the information of merger was prevalent in the market, a few informed traders had access to significant level of research and opinion-based information which had influenced the share price of SBI before merger. Given this backdrop, the present case analyzed impact of information asymmetry on the price, trading volumes and market capitalization of SBI shares.



Pedagogical Objectives

This case study helps to understand:

  • To compute asymmetric information cost
  • To understand the importance of having different levels of information amongst traders
  • To analyze the impact of asymmetric information cost on market parameters like trading volume, share price, etc.

Case Positioning and Setting

This case study can be used in MBA or Executive MBA courses to understand the following concepts:

  • Mergers and Acquisitions
  • Financial Markets
  • High Frequency Trading and Analytics



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- Case Study
- Teaching Note (**ONLY for Academicians)
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