Large capital infusions, investor reactions, and the return and risk performance of financial institutions over the business cycle and recent finanical crisis
AbstractThe authors 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. They 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. The authors 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. The authors 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. They find no evidence that banks' capital adequacy increased after the capital injections.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Federal Reserve Bank of Philadelphia in its series Working Papers with number 11-46.
Date of creation: 2011
Date of revision:
Other versions of this item:
- Elyas Elyasiani & Loretta J. Mester & Michael S. Pagano, 2013. "Large capital infusions, investor reactions, and the return and risk performance of financial institutions over the business cycle and recent finanical crisis," Working Papers 13-23, Federal Reserve Bank of Philadelphia.
- NEP-ALL-2011-11-01 (All new papers)
- NEP-BAN-2011-11-01 (Banking)
- NEP-CBA-2011-11-01 (Central Banking)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Dinara Bayazitova & Anil Shivdasani, 2012. "Assessing TARP," Review of Financial Studies, Society for Financial Studies, vol. 25(2), pages 377-407.
- Christopher A. Hennessy & Toni M. Whited, 2007. "How Costly Is External Financing? Evidence from a Structural Estimation," Journal of Finance, American Finance Association, vol. 62(4), pages 1705-1745, 08.
- Myers, Stewart C. & Majluf, Nicholas S., 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Journal of Financial Economics, Elsevier, vol. 13(2), pages 187-221, June.
- Slovin, Myron B. & Sushka, Marie E. & Polonchek, John A., 1999. "An analysis of contagion and competitive effects at commercial banks," Journal of Financial Economics, Elsevier, vol. 54(2), pages 197-225, October.
- Jensen, Michael C, 1986. "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review, American Economic Association, vol. 76(2), pages 323-29, May.
- Janet L. Yellen, 2008.
"The mortgage meltdown, financial markets, and the economy,"
FRBSF Economic Letter,
Federal Reserve Bank of San Francisco, issue Nov 7.
- Yellen Janet, 2009. "The Mortgage Meltdown, Financial Markets, and the Economy," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(3), pages 1-10, March.
- Krishnan, C.N.V. & Ergungor, O. Emre & Laux, Paul A. & Singh, Ajai K. & Zebedee, Allan A., 2010. "Examining bank SEOs: Are offers made by undercapitalized banks different?," Journal of Financial Intermediation, Elsevier, vol. 19(2), pages 207-234, April.
- Newey, Whitney K & West, Kenneth D, 1987.
"A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix,"
Econometric Society, vol. 55(3), pages 703-08, May.
- Whitney K. Newey & Kenneth D. West, 1986. "A Simple, Positive Semi-Definite, Heteroskedasticity and AutocorrelationConsistent Covariance Matrix," NBER Technical Working Papers 0055, National Bureau of Economic Research, Inc.
- Veronesi, Pietro & Zingales, Luigi, 2009.
CEPR Discussion Papers
7528, C.E.P.R. Discussion Papers.
- Cornett, Marcia Millon & Tehranian, Hassan, 1994. "An examination of voluntary versus involuntary security issuances by commercial banks *1: The impact of capital regulations on common stock returns," Journal of Financial Economics, Elsevier, vol. 35(1), pages 99-122, February.
- Slovin, Myron B. & Sushka, Marie E. & Polonchek, John A., 1992. "Informational externalities of seasoned equity issues : Differences between banks and industrial firms," Journal of Financial Economics, Elsevier, vol. 32(1), pages 87-101, August.
- Berger, Allen N. & Demsetz, Rebecca S. & Strahan, Philip E., 1999.
"The consolidation of the financial services industry: Causes, consequences, and implications for the future,"
Journal of Banking & Finance,
Elsevier, vol. 23(2-4), pages 135-194, February.
- Allen N. Berger & Rebecca S. Demsetz & Philip E. Strahan, 1998. "The consolidation of the financial services industry: causes, consequences, and implications for the future," Finance and Economics Discussion Series 1998-46, Board of Governors of the Federal Reserve System (U.S.).
- Demsetz, Rebecca S & Strahan, Philip E, 1997. "Diversification, Size, and Risk at Bank Holding Companies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(3), pages 300-313, August.
- Stewart C. Myers & Nicholas S. Majluf, 1984. "Corporate Financing and Investment Decisions When Firms Have InformationThat Investors Do Not Have," NBER Working Papers 1396, National Bureau of Economic Research, Inc.
- Polonchek, John & Slovin, Myron B. & Sushka, Marie E., 1989. "Valuation effects of commercial bank securities offerings : A test of the information hypothesis," Journal of Banking & Finance, Elsevier, vol. 13(3), pages 443-461, July.
- Elyasiani, Elyas & Mansur, Iqbal & Pagano, Michael S., 2007. "Convergence and risk-return linkages across financial service firms," Journal of Banking & Finance, Elsevier, vol. 31(4), pages 1167-1190, April.
- Myers, Stewart C. & Majluf, Nicolás S., 1945-, 1984. "Corporate financing and investment decisions when firms have information that investors do not have," Working papers 1523-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
- James W. Kolari & Seppo Pynnönen, 2010. "Event Study Testing with Cross-sectional Correlation of Abnormal Returns," Review of Financial Studies, Society for Financial Studies, vol. 23(11), pages 3996-4025, November.
- Michael R King, 2009. "Time to buy or just buying time? The market reaction to bank rescue packages," BIS Working Papers 288, Bank for International Settlements.
- Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, 03.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Beth Paul).
If references are entirely missing, you can add them using this form.