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Large capital infusions, investor reactions, and the return and risk-performance of financial institutions over the business cycle

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  • Elyasiani, Elyas
  • Mester, Loretta J.
  • Pagano, Michael S.

Abstract

We examine investors’ reactions to announcements of large capital infusions by U.S. financial institutions (FIs) from 2000 to 2009. These infusions include private market infusions (seasoned equity offerings (SEOs)) 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 FIs’ decisions to raise capital, the determinants of investor reactions, and post-infusion risk-taking of the recipients, as well as a sample of matching FIs. 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, and the stage of the business cycle. Smaller, more financially constrained non-bank institutions were more likely to have raised capital through private market offerings during the period prior to TARP, and firms receiving a TARP injection tended to be riskier and more levered. In the case of TARP recipients, they appeared to finance an increase in credit risk with more stable financing sources such as core deposits, which lowered their liquidity risk. However, we find no evidence that banks’ capital adequacy increased after the capital injections.

Suggested Citation

  • Elyasiani, Elyas & Mester, Loretta J. & Pagano, Michael S., 2014. "Large capital infusions, investor reactions, and the return and risk-performance of financial institutions over the business cycle," Journal of Financial Stability, Elsevier, vol. 11(C), pages 62-81.
  • Handle: RePEc:eee:finsta:v:11:y:2014:i:c:p:62-81
    DOI: 10.1016/j.jfs.2013.11.002
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    References listed on IDEAS

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    Cited by:

    1. Valeriya Dinger & Francesco Vallascas, 2014. "Are Banks Less Likely to Issue Equity When They Are Less Capitalized?," Working Papers 100, Institute of Empirical Economic Research, Osnabrueck University.
    2. Elyas Elyasiani & Elena Kalotychou & Sotiris Staikouras & Gang Zhao, 2015. "Return and Volatility Spillover among Banks and Insurers: Evidence from Pre-Crisis and Crisis Periods," Journal of Financial Services Research, Springer;Western Finance Association, vol. 48(1), pages 21-52, August.
    3. Sahin, Cenkhan & de Haan, Jakob, 2016. "Market reactions to the ECB’s Comprehensive Assessment," Economics Letters, Elsevier, vol. 140(C), pages 1-5.
    4. Sengupta, Rajdeep & Black, Lamont K. & Floros , Ioannis, 2016. "Raising capital when the going gets tough: U.S. bank equity issuance from 2001 to 2014," Research Working Paper RWP 16-5, Federal Reserve Bank of Kansas City.
    5. Beccalli, Elena & Frantz, Pascal, 2016. "Why are some banks recapitalized and others taken over?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 45(C), pages 79-95.
    6. Deli, Yota D. & Hasan, Iftekhar, 2017. "Real effects of bank capital regulations: Global evidence," Journal of Banking & Finance, Elsevier, vol. 82(C), pages 217-228.
    7. Espenlaub, Susanne & Goyal, Abhinav & Mohamed, Abdulkadir, 2016. "Impact of legal institutions on IPO survival: A global perspective," Journal of Financial Stability, Elsevier, vol. 25(C), pages 98-112.
    8. Li, Hui & Liu, Hong & Siganos, Antonios & Zhou, Mingming, 2016. "Bank regulation, financial crisis, and the announcement effects of seasoned equity offerings of US commercial banks," Journal of Financial Stability, Elsevier, vol. 25(C), pages 37-46.

    More about this item

    Keywords

    Securities issuance; Market reaction; Financial service firms; Commercial banks; Government intervention;

    JEL classification:

    • F3 - International Economics - - International Finance

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