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The Financial Services Modernization Act of 1999 repeals the Depression-era Glass-Steagall Act (1933) and the Bank Holding Company Act (1956) and allows insurance firms for the first time to merge with banks and cross sell non-traditional insurance products. Previous studies suggest that such an opportunity will lead to consolidation in the financial services industry. In this study we investigate whether the FSMA will lead to mergers between insurance companies and other firms in the financial services industry by analyzing the announcements leading to the FSMA. Our study shows that relaxation of merger barriers creates a wealth effect for firms in the industry. We also find a larger wealth effect for life and property/casualty insurers, which are predicted to generate the highest diversification benefit when combined with bank holding companies. Cross-industry merger opportunities and regulatory changes also reduce the systematic risk of firms in the insurance industry. The cross-sectional variation of the wealth effect can be explained by the type of insurance, size, and performance as well as the diversification benefit. As predicted by merger literature, larger and poorly performing firms a have higher wealth effect.
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