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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

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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.............

ASYMMETRIC INFORMATION

Asymmetric information is the information in a financial transaction whenever one trader possesses greater knowledge or information than the other. Generally, it occurs when the seller has greater knowledge than the buyer, although the opposite is also possible. In Indian market, almost all transactions involve information asymmetries.

Asymmetric information is the specialized knowledge applied to a trade. In financial markets, the trader with more information will be able to make informed decision. During the buy or sell of a financial security, asymmetric information occurs when either the buyer or seller has more information on the past, present or future performance of that security.................

COST MEASUREMENT FOR ASYMMETRIC INFORMATION

One of the popular measurement techniques for Information Asymmetry in the market is Asymmetric Information Cost or Adverse Selection Cost. Bid-Ask spread contains asymmetry information. Bid-Ask spread consists of three components: Order Processing Cost, Asymmetry Information Cost and Inventory Holding Cost. For order-driven markets, like Indian market, there is no scope of inventory holding cost. Adverse selection cost was first suggested by Bagehot (1971). Copeland and Galai (1983), Easley and O’Hara (1987), and Glosten and Milgrom (1985) coined the concept of information costs faced by liquidity suppliers while trading with informed traders............

ASYMMETRIC INFORMATION ASSESSMENT PROCESS

Computation of Quoted Spread

As per Stoll (1989) and Bessembinder and Venkataraman (2010), quoted spread is computed using the following equation-

..................

Implicit Measure of Bid-Ask Spread

Implicit measure of percentage spread is computed based on study by Roll (1984). Roll’s measure of the spread follows directly from equation which depends on serial co-variance of price changes...........

Associated Cost Components of Bid-Ask Spread

Computation of cost components were done for each stock on each trading day. For that purpose, each trading day and each stock data, within the timeline of 9:30AM to 3:30PM, were divided into 5-min intervals. So for each trading day, there were 72 intervals...........

SBI Share Price movement during Merger

During the first quarter of 2016-17, the merger was in the news. The Indian cabinet approved the merger on June 15th 2016. As on June 15th 2016, the share price was hovering around INR216, which significantly grew and reached to around INR274.15 as on March 17th 2017 which was the record day for share swap..........

SBI Traded Volume Movement during Merger

The analysis of daily trading volume from June 16th 2016 to March 17th 2017 revealed that the standard deviation of daily traded volume for SBI is much higher than the standard deviation of Nifty50 index daily traded volume. Thus, through the analysis of the movement of price and traded volume, it can be inferred that the SBI stock was highly volatile..............

SBI Trading Frequency Movement during Merger

The analysis of daily number of trades from June 16th 2016 to March 17th 2017 indicated the trading volume fluctuations with minimum trading volume of 75,000, maximum of 425,000 and average of 275,000. The fluctuations indicate the market behaviors...........

Datasets for the Study

The case study focuses on the impact of SBI and its associates’ merger announcement on SBI stock price. The time period is from June 16th 2016 to August 31st 2016 which is perfect for capturing post-announcement market behavior............

Measurement of Asymmetry Information

Using Affleck-Graves et al. (1994) findings, the current study estimated the asymmetry information cost for SBI stock on ‘Quoted Spread’, which in turn was estimated through Roll’s covariance. Asymmetric Information is computed in Indian currency for 53 trading days. The graphical analysis indicates.............

Co-movement of Asymmetric Information, Share Price, Trading Volume and Return

The graphical analysis reveals the co-movment of trading volume and asymmetric information. The fluctuations are due to arrival of different news and their impact on the market during regular trading days...........

Relationship between Asymmetric Information and Market Indicators

To analyze further, this study conducted correlation analysis of asymmetric information with various market indicators like stock return and beta of stock. Beta is a measure of a stock’s volatility in relation to the market...........

Conclusion

The merger of SBI and its associates has created differentiated information in the market. The study found that asymmetric behaviors amongst traders have influenced the share price. The correlation of asymmetric information with share price, beta of stock, and daily return found to be negative in each case, which implies that, asymmetric information has pulled down the share price during the time of merger..........

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. .........................

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



This Case Pack Includes:
- Abstract
- Case Study
- Teaching Note (**ONLY for Academicians)
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