Effect of merger on the credit rating and performance of taiwan security firms

Abstract

The effect of a merger on credit rating is investigated by testing the significance of change in a firm’s rank based on comprehensive performance score and synergistic gains. We extract principle component factors from a set of financial ratios. Percentage of variability explained and factor loadings are adjusted to get a modified average weight for each financial ratio. This weight is multiplied by the standardized Z value of the variable, and summed a set of variables to get a firm’s performance score. Performance scores are used to rank the firm. Statistical significance of difference in pre- and post-merger rank is tested using the Wilcoxon sign rank (double end). We studied the merger of financial firms after the enactment of Taiwan’s Merger Law for Financial Institution in November 2000 to examine synergies produced by merger. Synergistic gains affect corporate credit ratings. After taking into account the large Taiwan market decline from 1999 to 2000, test results show there is no significant operating, market, and financial synergy produced by the merger firms. Most likely explanations for the insignificant rank changes are short observation period and the lack of an adequate sample in this investigation. We identify and define variables for merger synergy analysis followed by principal component factor analysis, variability percentage adjustment, and performance score calculation. Finally, Wilcoxon sign rank test is used for hypothesis testing. Reader is well referred to the appendix for details.