Investor reactions to major events in the sub-prime mortgage crisis

We investigate how investor perceptions about the financial health of twenty-seven bank holding companies that controlled eighty percent of US banking assets at year-end 2006 changed during major events leading to the collapse of Lehman Brothers. We use the event study method to investigate whether and to what extent investors priced major events before the Lehman bankruptcy. Abnormal returns on the event days range from -9.25 to 4.80%. When the Federal Reserve Bank of New York is authorized to lend to Fannie Mae and Freddie Mac on 13 July 2008, sample bank holding companies average the lowest abnormal returns of -9.25. When the Federal Housing Agency places Fannie Mae and Freddie Mac under government conservatorship on 7 September 2008, abnormal returns average the highest at 4.80. The significant abnormal returns indicate that investors price the information released in the pre-crisis events.