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Stock demand curves and TARP returns

  • Linus Wilson
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    Purpose – The purpose of this paper is to determine if the US Treasury's at-the-market sales of 5.27 billion Citigroup shares in 2010 drove down the banks' share price. It attempts to use the evidence of Citigroup's stock returns to accept or reject competing hypotheses of larger stock sales. Design/methodology/approach – The paper uses a geometric Brownian motion model to test if there were abnormal returns at various points in the US Treasury's highly publicized stock sale that lasted from 26 April to 6 December 2010. Findings – There was a weakly significant drop in the stock price at the announcement of the sale and a weakly significant rise in the stock price just after it ended. This is evidence that the demand curve for the stock had a negative slope. Practical implications – The evidence from this study will influence policy makers and investors in the upcoming privatizations of large bailed-out firms such as American International Group, Ally Financial, Chrysler, and General Motors. The evidence indicates that slow at-the-market sales may temporarily depress stock prices more than quicker, underwritten secondary offerings. Patient investors may experience modest abnormal returns from providing liquidity to the US Treasury as it privatizes its holdings. Originality/value – This is the only paper to study the stock price impacts of the US Treasury's liquidation of its 27 percent stake in Citigroup in 2010. Because the stock sales were delegated to a third party and highly publicized, unlike most other large stock sales, the Citigroup privatization is an unprecedented opportunity to test if the demand curve for common stocks is perfectly elastic. JEL classification: G01, G13, G21, G28, G32

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    Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

    Volume (Year): 3 (2011)
    Issue (Month): 3 (August)
    Pages: 229-242

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    Handle: RePEc:eme:jfeppp:v:3:y:2011:i:3:p:229-242
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    1. Crystal Lin & Kenneth Yung, 2006. "Equity Capital Flows and Demand for REITs," The Journal of Real Estate Finance and Economics, Springer, vol. 33(3), pages 275-291, November.
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    4. Jeffrey Wurgler & Ekaterina Zhuravskaya, 2002. "Does Arbitrage Flatten Demand Curves for Stocks?," The Journal of Business, University of Chicago Press, vol. 75(4), pages 583-608, October.
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    6. Kraus, Alan & Stoll, Hans R, 1972. "Price Impacts of Block Trading on the New York Stock Exchange," Journal of Finance, American Finance Association, vol. 27(3), pages 569-88, June.
    7. Linus Wilson & Yan Wu, 2010. "Common (stock) sense about risk-shifting and bank bailouts," Financial Markets and Portfolio Management, Springer, vol. 24(1), pages 3-29, March.
    8. Scholes, Myron S, 1972. "The Market for Securities: Substitution versus Price Pressure and the Effects of Information on Share Prices," The Journal of Business, University of Chicago Press, vol. 45(2), pages 179-211, April.
    9. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, 09.
    10. Ernest N. Biktimirov & Arnold R. Cowan & Bradford D. Jordan, 2004. "Do Demand Curves for Small Stocks Slope Down?," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 27(2), pages 161-178.
    11. Ernest N. Biktimirov, 2004. "The Effect of Demand on Stock Prices: Evidence from Index Fund Rebalancing," The Financial Review, Eastern Finance Association, vol. 39(3), pages 455-472, 08.
    12. Shleifer, Andrei, 1986. " Do Demand Curves for Stocks Slope Down?," Journal of Finance, American Finance Association, vol. 41(3), pages 579-90, July.
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