Inter-industry contagion and the competitive effects of financial distress announcements: evidence from commercial banks and life insurance companies
Contagion usually refers to the spillover of the effects of shocks from one or more firms to other firms. Most studies of contagion limit their analysis to how shock affect firms in the same industry, or "intra-industry" contagion. The purpose of this paper is to explore and document the likely magnitude of "inter-industry" contagion. In their comprehensive study of intra-industry contagion using many individual industries Lang and Stulz (1992) argue that if contagion is not simply an informational effect it will impose a social cost on our economic system. If this is true for intra-industry contagion, then the same argument must hold for inter-industry contagion as well. We focus on inter-industry contagion effects in this paper because the vast majority of the extant literature about contagion has neglected its important potential cost to shareholders. Most of the studies on contagion attempts to differentiate between a "pure" contagion effect and a signaling or information-based contagion effect. An example of a pure contagion effect would be the negative effects of a bank failure spilling over to other banks regardless of the cause of the bank failure. And, an example of a signaling contagion effect would be if a bank failure is caused by problems whose revelation is correlated across banks, and the correlated banks are impacted negatively. We conduct our investigation of contagion by examining three separate announcements involving adverse information about commercial real estate portfolios. The first announcement is by a large commercial bank (the Bank of New England), the second announcement consists of a series of events--from several large banking organizations and a regulatory agency (the Office of the Comptroller of the Currency), and the third announcement is by a large life insurance company (Travelers). There are two reasons we chose these particular events. First, the events seemed to be very unusual and very significant indicators of future (and present) financial distress. Second, the events shared a common theme of financial distress caused by problems with commercial real estate portfolios. We first establish that the commercial bank announcements negatively impact the equity values of life insurance companies (and vice versa). Next, we demonstrate that the bank regulatory agency announcement negatively impacts the equity values of life insurance companies as well as commercial banks. We then explicitly test if the shareholder wealth effects are linked to a set of specific firm characteristics. Consistent with previous contagion studies, our results provide strong evidence of "intra-industry" contagion related wealth effects. We also find that these contagion effects, to a significant degree, can be explained by firm specific variables. This implies that the intra-industry spillover effects associated with our three events are not of the totally "pure" contagion variety, but have an informational component as well. We also find very strong evidence of significant "inter-industry" contagion-based shareholder wealth effects. Again, these contagion-based wealth effects do not appear to be purely contagion-based. Wealth effects can also be explained by such factors as geographic proximity, asset composition, liability composition, leverage, size, and regulatory expectations.
|Date of creation:||2002|
|Date of revision:|
|Contact details of provider:|| Postal: P.O. Box 834, 230 South LaSalle Street, Chicago, Illinois 60690-0834|
Web page: http://www.chicagofed.org/
More information through EDIRC
|Order Information:|| Web: http://www.chicagofed.org/webpages/publications/print_publication_order_form.cfm Email: |
References listed on IDEAS
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.:
- Dodd, Peter & Warner, Jerold B., 1983. "On corporate governance : A study of proxy contests," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 401-438, April.
- Ram T. S. Ramakrishnan & Anjan V. Thakor, 1984. "Information Reliability and a Theory of Financial Intermediation," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 415-432.
- Binder, John J, 1988. "The Sherman Antitrust Act and the Railroad Cartels," Journal of Law and Economics, University of Chicago Press, vol. 31(2), pages 443-68, October.
- Aharony, Joseph & Swary, Itzhak, 1983. "Contagion Effects of Bank Failures: Evidence from Capital Markets," The Journal of Business, University of Chicago Press, vol. 56(3), pages 305-22, July.
- Diamond, Douglas W & Dybvig, Philip H, 1983.
"Bank Runs, Deposit Insurance, and Liquidity,"
Journal of Political Economy,
University of Chicago Press, vol. 91(3), pages 401-19, June.
- Grammatikos, Theoharry & Saunders, Anthony, 1990.
"Additions to bank loan-loss reserves : Good news or bad news?,"
Journal of Monetary Economics,
Elsevier, vol. 25(2), pages 289-304, March.
- Theoharry Grammatikos & Anthony Saunders, 1988. "Additions to bank loan-loss reserves: good news or bad news?," Working Papers 89-7, Federal Reserve Bank of Philadelphia.
- Donald Hester, 1992. "Financial institutions and the collapse of real estate markets," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 36, pages 114-150.
- Flannery, Mark J, 1998. "Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 273-305, August.
- John J. Binder, 1985. "Measuring the Effects of Regulation with Stock Price Data," RAND Journal of Economics, The RAND Corporation, vol. 16(2), pages 167-183, Summer.
- White, Halbert, 1982. "Instrumental Variables Regression with Independent Observations," Econometrica, Econometric Society, vol. 50(2), pages 483-99, March.
- Boot, Arnoud W. A. & Thakor, Anjan V., 1991. "Off-balance sheet liabilities, deposit insurance and capital regulation," Journal of Banking & Finance, Elsevier, vol. 15(4-5), pages 825-846, September.
- Jackson, William E, III, 1992. "Is the Market Well Defined in Bank Merger and Acquisition Analysis?," The Review of Economics and Statistics, MIT Press, vol. 74(4), pages 655-61, November.
- Douglas W. Diamond, 1984. "Financial Intermediation and Delegated Monitoring," Review of Economic Studies, Oxford University Press, vol. 51(3), pages 393-414.
- Nathaniel B. Cabanilla, 1992. "Analyzing developments in the life insurance industry--commercial mortgage investment," Proceedings 391, Federal Reserve Bank of Chicago.
- Fama, Eugene F, 1991. " Efficient Capital Markets: II," Journal of Finance, American Finance Association, vol. 46(5), pages 1575-617, December.
- Aharony, Joseph & Swary, Itzhak, 1996. "Additional evidence on the information-based contagion effects of bank failures," Journal of Banking & Finance, Elsevier, vol. 20(1), pages 57-69, January.
- 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.
- James, Christopher, 1987. "Some evidence on the uniqueness of bank loans," Journal of Financial Economics, Elsevier, vol. 19(2), pages 217-235, December.
- George J. Stigler & Robert A. Sherwin, 1983.
"The Extent of the Market,"
University of Chicago - George G. Stigler Center for Study of Economy and State
31, Chicago - Center for Study of Economy and State.
- Diamond, Douglas W & Dybvig, Philip H, 1986. "Banking Theory, Deposit Insurance, and Bank Regulation," The Journal of Business, University of Chicago Press, vol. 59(1), pages 55-68, January.
- Richard M. Todd & Neil Wallace, 1992. "SPDAs and GICs: like money in the bank?," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-17.
- Schwert, G William, 1981. "Using Financial Data to Measure Effects of Regulation," Journal of Law and Economics, University of Chicago Press, vol. 24(1), pages 121-58, April.
- Fama, Eugene F., 1985. "What's different about banks?," Journal of Monetary Economics, Elsevier, vol. 15(1), pages 29-39, January.
- Akhigbe, Aigbe & Madura, Jeff, 2001. "Why do contagion effects vary among bank failures?," Journal of Banking & Finance, Elsevier, vol. 25(4), pages 657-680, April.
- Diamond, Douglas W, 1991. "Monitoring and Reputation: The Choice between Bank Loans and Directly Placed Debt," Journal of Political Economy, University of Chicago Press, vol. 99(4), pages 689-721, August.
- Swary, Itzhak, 1986. "Stock Market Reaction to Regulatory Action in the Continental Illinois Crisis," The Journal of Business, University of Chicago Press, vol. 59(3), pages 451-73, July.
- White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
- Bhattacharya Sudipto & Thakor Anjan V., 1993. "Contemporary Banking Theory," Journal of Financial Intermediation, Elsevier, vol. 3(1), pages 2-50, October.
- Chinmoy Ghosh & Randall S. Guttery & C.F. Sirmans, 1997. "The Effects of the Real Estate Crisis on Institutional Stock Prices," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 25(4), pages 591-614.
- Fama, Eugene F., 1980. "Banking in the theory of finance," Journal of Monetary Economics, Elsevier, vol. 6(1), pages 39-57, January.
- Chamberlain, Gary, 1982. "Multivariate regression models for panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 5-46, January.
- Fenn, George W. & Cole, Rebel A., 1994. "Announcements of asset-quality problems and contagion effects in the life insurance industry," Journal of Financial Economics, Elsevier, vol. 35(2), pages 181-198, April.
- Elijah Brewer & Thomas H. Mondschean & Philip E. Strahan, 1993. "Why the life insurance industry did not face an "S&L-type" crisis," Economic Perspectives, Federal Reserve Bank of Chicago, issue Sep, pages 12-24.
When requesting a correction, please mention this item's handle: RePEc:fip:fedhwp:wp-02-23. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bernie Flores)
If references are entirely missing, you can add them using this form.