The Effect of M&A Announcements on Stock Price Behavior and Financial Performance Changes: The Case of Arab Malaysian Bank Berhad and Hong Leong Bank Berhads 17 THE EFFECT OF M&A ANNOUNCEMENTS ON STOCK PRICE BEHAVIOR AND FINANCIAL PERFORMANCE CHANGES: THE CASE OF ARAB MALAYSIAN BANK BERHAD AND HONG LEONG BANK BERHAD Carl B. McGowan, Jr., Norfolk State University Zunaidah Sulong, Universiti Putra Malaysia INTRODUCTION One explanation of the Asian Financial Crisis of 1997-1998 is that the financial crisis resulted from the Contagion Effect after the Thai Baht collapse. Siegel (2002) states that leaving a fixed currency regime for a developing economy implies significant other problems, all of which were present in Thailand. These problems would include balance of payments deficits, government spending deficits, and increasing inflation. Investors leaving the Baht also left other Asian currencies leading to currency collapse in the region. Siegel (2002) further states that investors assumed that if Thailand was having fundamental economic problems, the other Asian countries might be having similar problems. Unlike the rest of the Asian countries affected by the Financial Crisis, Malaysia did not implement an IMF program but used a number of policy changes to control the effects of the Financial Crisis. Malaysia pegged the ringgit to the dollar and imposed selected capital controls to stabilize the currency (ringgit) and stop the capital outflow which was beyond the capability of the government to control. One of the early programs of the Malaysian government to resolve the effects of the Financial Crisis was restructuring the financial system of Malaysia 1 . Danaharta 2 was created in May 1998 to acquire and workout to the extent possible non-performing loans of Malaysian banks. Danamodal 3 was created to restructure Malaysian banks whose equity had fallen below nine percent. The Corporate Debt Restructuring Committee was created to facilitate voluntary restructuring of corporate debt. In July 1998, the government announced a restructuring program to consolidate fifty-eight financial institutions in Malaysia into six major bank groups 4 . The anchor bank system was to consolidate the financial system to improve competitiveness and to reduce the number of bankruptcies in the financial system. Mergers and acquisitions (M&A) have been, a priori, associated with the strengthening of a firm’s financial position and increasing firm value. Firms involved in a consolidation program should benefit operationally and financially as a result of M&A activity. According to Ogden, Jen, and O’Connor (2003), the motives for M&A include: (1) operating synergy; (2) financial synergy and diversification; (3) bankruptcy avoidance; (4) financial slack; (5) hubris; and (6) self-interest of the bidder’s management.