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Large Capital Infusions, Investor Reactions, and the Return and Risk Performance of Financial Institutions over the Business Cycle and Recent Financial Crisis

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  • Elyasiani, Elyas

    (Temple University)

  • Mester, Loretta J.

    (Federal Reserve Bank of Philadelphia and University of PA)

  • Pagano, Michael S.

    (Villanova University)

Abstract

We examine investors' reactions to announcements of large seasoned equity offerings (SEOs) by U.S. financial institutions (FIs) from 2000 to 2009. These offerings include market infusions as well as injections of government capital under the Troubled Asset Relief Program (TARP). The sample period covers both business cycle expansions and contractions, and the recent financial crisis. We present evidence on the factors affecting FI decisions to issue capital, the determinants of investor reactions, and post-SEO performance of issuers as well as a sample of matching FIs. We find that investors reacted negatively to the news of private market SEOs by FIs, both in the immediate term (e.g., the two days surrounding the announcement) and over the subsequent year, but positively to TARP injections. Reactions differed depending on the characteristics of the FIs, stage of the business cycle, and conditions of financial crisis. Larger institutions were less likely to have raised capital through market offerings during the period prior to TARP, and firms receiving a TARP injection tended to be larger than other issuers. We find that while TARP may have allowed FIs to increase their lending (as a share of assets) in the year after the issuance, they took on more credit risk to do so. We find no evidence that banks' capital adequacy increased after the capital injections.

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  • Elyasiani, Elyas & Mester, Loretta J. & Pagano, Michael S., 2011. "Large Capital Infusions, Investor Reactions, and the Return and Risk Performance of Financial Institutions over the Business Cycle and Recent Financial Crisis," Working Papers 11-51, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:11-51
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    2. Pennathur, Anita & Smith, Deborah & Subrahmanyam, Vijaya, 2014. "The stock market impact of government interventions on financial services industry groups: Evidence from the 2007–2009 crisis," Journal of Economics and Business, Elsevier, vol. 71(C), pages 22-44.
    3. Farruggio, Christian & Michalak, Tobias C. & Uhde, Andre, 2013. "The light and dark side of TARP," Journal of Banking & Finance, Elsevier, vol. 37(7), pages 2586-2604.
    4. Bank for International Settlements, 2012. "Operationalising the selection and application of macroprudential instruments," CGFS Papers, Bank for International Settlements, number 48, december.
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    6. Black, Lamont K. & Hazelwood, Lieu N., 2013. "The effect of TARP on bank risk-taking," Journal of Financial Stability, Elsevier, vol. 9(4), pages 790-803.
    7. Evans, Joshua J. & Haq, Mamiza, 2022. "Does bank capital reduce liquidity creation?," Global Finance Journal, Elsevier, vol. 54(C).

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    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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