The Financial Crisis in Greek Banking Industry - Dissertation Example

However, it is an important part of the dissertation because it makes a significant contribution in backing the researcher’s point of view while providing current knowledge including substantive findings in terms of theoretical and methodological contribution. It reviews the books, journal articles, and magazines to give new interpretations to old sources. In the article written by Li and Xu (2002), it is stated that higher- risk assets give higher returns in comparison to low-risk assets like treasury bills (see table1 below).

It forms a basis for the decision of asset allocation and making an estimation of interest rates in financial markets (Haitao Li and Yuewu Xu, 2002). During the process of bidding demand for firm’s products and its value influence the financial premium of the firm. It is so because there is a direct correlation between net expected value and performance of the firm as it yields higher returns. This implies that the higher the value of the firm the higher premiums. Barberis, et al, (2001) held the view that higher volatility is recorded in the stock prices of a company when performance if its assets are not up to the standard.

The entire banking industry came under pressure due to credit turmoil and subsequent deterioration of global market which in turn prompted the intervention of the central banks particularly the IMF and the World Bank. This sector was adversely affected by the inherent weakness of the Greek economy that is a result of rising debt and deficits. However, improvements have been noticed in the premiums paid because of the strong legal framework and improvements to the operational model. A similar report finds that, as a way of increasing the economies of scale, merger and acquisitions were imminent.

The risk in the assets can be reduced by diversification of the assets. It also brings profitability and promotes growth besides improving the survival rate in similar future financial crises. According to Nenova (2006) desire of having effective control over the firm and then pressurize the shareholders to sell the firm at a lower price is the reason why banks overvalue premium during the process of mergers and acquisitions. In addition to this, the value of the premium is also influenced by enforceability of ownership rights and confidence in the target banks ( LaPorta et al.

, 1998; Djankov et al., 2008; Nenova,2006; Bris and Cabolis,2008). As provided, the weaker the shareholder protection creates get-out for managers, shareholders to seize smaller, and minority shareholders with motives of gaining higher private benefits (Dyck and Zingales, 2004). A research study conducted by Hunter and Wall (1995) stated that acquirers are interested to pay more premiums for the banks that adopt strategies such as diversification for reducing combined firm’s overall risk and for the banks that would increase the value of the government safety net to the combined firm.

With the help of regression analysis, it can be understood that a target with high variance of own profitability and high covariance with the acquirer’s profitability will yield less premium. Theory of diversification will also make the similar implication. MANNER OF PREMIUMS COMPUTATIONS: a) An Informal Model of Bank Takeover Pricing During the process of valuation of a bank for merger and acquisition, several factors are considered by the bidder.