Do CRA - related Events Affect Shareholder Wealth ? The Case of Bank Mergers

* The views expressed are not necessarily those of the Board of Governors of the Federal Reserve System or its staff. 2 Abstract This study examines the issue of whether CRA-related events impact the security prices of banking institutions involved in mergers. While previous research has established that bank shareholders experience a significant permanent loss of wealth upon the announcement of a CRA protest, the current research finds no such evidence for either CRA protests or the removal of CRA protests using a sample of banks involved in mergers between 1986 and 1998. We identify a key econometric issue associated with event studies – the choice of a reference point for determining a bank's baseline security price dynamics – as the driving factor in the divergence of the results. We argue that the choice of a reference point should ideally cause the effects of other events that have an independent influence on security price movements to be excluded from the analysis, which is the method employed in the current research. Supplemental analyses using a cross-sectional model of cumulative abnormal returns provide evidence that the market responds to CRA-related events, although the evidence does not generally support the view that such events have had large and significant negative impacts on bank stock prices.