The market reaction to debt announcements: UK evidence surrounding the global financial crisis

We examine the stock market response to announcements of public, bank and privately placed debt issuance by large UK firms surrounding the global financial crisis of 2008. Prior to the crisis, we find that stock prices respond positively to announcements of bank debt issuance only. This is restricted to the sub-sample of syndicated bank loans and this is suggestive of the certification from multiple lenders conveying a signal of creditworthiness. We find that abnormal returns on the announcement of bank loans have declined since the financial crisis, both in absolute terms and in comparison to alternative borrowing sources. Overall, our results suggest that surrounding the global financial crisis of 2008, bank loans have become less informative as a signal of the creditworthiness of borrowing firms.     

Market response to syndicated loan announcements from high-profile failed and acquiring banks during the global financial crisis

Previous studies that have examined the impact of the 2008 financial crisis on syndicated loans have ignored potential differences between lending banks by explicitly or implicitly aggregating all lenders together and focusing on borrower characteristics. One must jointly consider both borrower and lender to fully understand the complex role of the syndicate during this period. We consider the identity of the lender, with a focus on five major US banks that failed and their five corresponding acquirers. Our results highlight the distinct roles of investment and commercial banks and facilitate an understanding of relationship and transactional-based lending.     

The impact of monetary policy announcements on the stock price of large European banks during the financial crisis

Since 2007, the European Central Bank responded decisively to the challenges posed by the global financial crisis, reducing key policy interest rates to unprecedented low levels and intervening with non-standard policy measures (i.e., monetary easing and liquidity provision). This paper aims to assess the impact of ECB monetary policy announcements on the stock price of large European banks. As a first step, an event study is conducted in order to measure cumulated abnormal returns (CARs) around the announcements over June 2007–June 2013; the second step is a regression analysis aimed at identifying the determinants of CARs. Results show that banks were more sensitive to non-conventional measures than to interest rate decisions, and that the same type of intervention may have a different impact depending on the stage of the crisis. In addition, banks with weaker balance sheets and operating with high-risk were more sensitive to monetary policy interventions.     

Abnormal returns and asymmetric information surrounding strategic and financial acquisitions

Using takeover bids from the United States, we investigate the importance of information asymmetry in self-selection when evaluating the abnormal returns of financial versus strategic takeover targets during a period of possible informed trade. Sample selection bias due to differences in financial versus strategic takeover bid information environments is controlled for using Heckman's model. Results show that takeover announcements are not randomised, indicative of timed announcements, and further that private equity firms exhibit lower price impact post-announcement. We conclude that the long-term financial motive of private equity takeovers, coupled with higher private information pre-announcement, leads to lower abnormal returns post-announcement.     

Corporate bond returns and the financial crisis

We examine effects of government actions and related accounting policies on the corporate bond market implied by changes in relations between aggregate bond returns and cash flow and discount rate news. We capture the influence of risk by partitioning bonds into investment and speculative grades. We use earnings changes as a proxy for cash flow news and T-Bill rate changes as a proxy for discount rate news. As expected, during non-crisis periods, we observe a positive relation between earnings changes and bond returns and a negative relation for T-Bill rate changes. A combination of government bailouts of large financial institutions and mark-to-market accounting preserves the positive relation for earnings changes during the crisis for investment grade bonds, while absence of these factors leads to an insignificant relation for speculative grade. Intervention by the Federal Reserve to induce lower interest rates as earnings were declining, a flight to safety shifting demand from corporate bonds to T-Bills, and low cost funds invested in risk free investments explain a reversal of the relation between bond returns and T-Bill rate changes for both grades.     

MENA stock market volatility persistence: Evidence before and after the financial crisis of 2008

The global financial crisis began with a financial meltdown in the United States in early 2008 and then it had spread to the rest of the world. In this paper we test whether the MENA equity market volatility presents a different behavior before and after the financial crisis of 2008. Using long range dependence techniques we test for long memory in the returns, absolute and squared returns of the MENA equity markets. We subject the series to unit root tests that allow for structural breaks and use the Bai and Perron (1998, Econometrica, 66, 47; 2003a, J. Appl. Econometrics, 6, 72; 2003b, Econometrics J., 18, 1) to test for multiple breaks in the mean returns. The results indicate that the volatility measures represented by absolute and squared returns show evidence of long memory for the full and subsample periods, while the returns show a weak evidence of long memory. Considering the shift dates and corresponding to the 2008 financial crisis, the returns and volatility measures display less evidence of long memory in the after crisis period as opposed to the before crisis period. The change in the returns and volatility dynamics of these markets was due to financial and economic conditions that took place in the MENA region after the crisis.     

National culture and bank performance: Evidence from the recent financial crisis

We examine whether the prevailing national culture has been material in determining bank performance during the recent financial crisis. In this paper, we focus on three particular national culture dimensions: uncertainty avoidance, individualism/collectivism, and power distance. We expect banks from high uncertainty avoidance and power distance societies to perform relatively better during the recent financial crisis. On the other hand, banks in individualistic (collectivist) societies are likely to perform worse (better) during the crisis. Using an international sample of 3438 banks from 48 countries, we find support for our main conjectures. Specifically, we establish that uncertainty avoidance, collectivism, and power distance have a first order impact on bank performance during the crisis. Our results are robust to a battery of additional checks, including additional variables, alternative samples, and correcting for potential endogeneity.     

Liquidity risk and stock performance during the financial crisis

We investigate whether and how ex-ante liquidity risk affects realized stock returns during the global financial crisis of 2008–2009 in international equity markets. We find that stocks with higher pre-crisis return exposure to global market liquidity shocks experience larger price reductions during the crisis period. Our findings provide further insight into the comprehensive picture of the effect of liquidity risk on asset prices, especially in an international context and under different market conditions.     

Credit risk,owner liability,and bank loan maturities during the global financial crisis

We relate credit risk and owners’ personal guarantees to bank loan maturities during the global financial crisis. The findings, which remain robust to reverse causality, show that firms rated as low risk, with a strong relationship with the bank, whose owners provided personal guarantees and with large loan sizes obtained longer maturities. Banks with larger nonperforming loans provided loans with shorter maturities. Firms with low‐ and high‐risk ratings that provided owners’ personal guarantees obtained longer maturities. These findings shed additional light on the relationship between risk and loan maturities and the role of personal guarantees in reducing information asymmetries.     

The certification value of private debt renegotiation and the design of financial contracts: Empirical evidence from Europe

By using a sample of bank loan renegotiations by European firms, I show that the renegotiation of financial contracts bears a certification value, while deeply changing the contractual features of the loan over time, to the benefit of shareholders. I find that amendments to financial covenants and to loan amounts increase the cumulative abnormal returns of a borrowing firm by 10–15%. Early and less frequent renegotiations of bilateral loans with short maturities also imply a positive stock market reaction. Amendments signaling the early accrual of new and positive information allow increasing firm value.     

Bank soundness and bank lending to new firms during the global financial crisis

This paper examines how the soundness of financial institutions affected bank lending to new firms during the 2008 financial crisis by using a unique firm–bank match‐level dataset of 1,467 unlisted small and medium‐sized enterprises incorporated in Japan. We employ a within‐firm estimator that can control for unobserved firms’ demand for credit through firm ? time fixed effects. The major findings of this paper are the following four points. First, sounder financial institutions may be generally less likely to provide financing to new firms. Second, our results suggest that sounder financial institutions were less likely to provide loans to new firms during the 2008 financial crisis. Third, financial institutions were less likely to provide financing to new firms during such crisis as compared to those with the same soundness during non‐crisis periods. Finally, such lending relationships to new firms that are established during the financial crisis by sounder financial institutions are more likely to be continued than such lending by less sound financial institutions.     

The information content of Eonia swap rates before and during the financial crisis

Before August 2007, implied forward rates in the overnight interest swap rates closely reflected market expectations about the future path of the Eonia, and therefore, about the future course of the ECB’s monetary policy stance. Nevertheless, this link was weakened considerably during the most acute episode of the financial crisis. Using the expectations hypothesis of the term structure as a benchmark model for the determination of the overnight interest swap rates, we find that after May 2010 the monetary transmission mechanism was partially restored when the ECB implemented various ‘unconventional measures’ in response to the financial crisis. On the contrary, liquidity and credit risks are still present in unsecured deposit markets, distorting the pricing and transmission of the ECB monetary policy stance along the Euribor rates. These results should be of interest for regulators, financial institutions, and researchers in European money markets.     

Daily pricing of emerging market sovereign CDS before and during the global financial crisis

In this paper, we study the determinants of daily spreads for emerging market sovereign credit default swaps (CDSs) over the period April 2002–December 2011. Using GARCH models, we find, first, that daily CDS spreads for emerging market sovereigns are more related to global and regional risk premia than to country-specific risk factors. This result is particularly evident during the second subsample (August 2007–December 2011), where neither macroeconomic variables nor country ratings significantly explain CDS spread changes. Second, measures of US bond, equity, and CDX High Yield returns, as well as emerging market credit returns, are the most dominant drivers of CDS spread changes. Finally, our analysis suggests that CDS spreads are more strongly influenced by international spillover effects during periods of market stress than during normal times.     

Bank ownership,lending, and local economic performance during the 2008–2009 financial crisis

Although government banks are frequently associated with political capture and resource misallocation, they may be well-positioned during times of crisis to provide counter-cyclical support. Following the collapse of Lehman Brothers in September 2008, Brazil׳s government banks substantially increased lending. Localities in Brazil with a high share of government banks received more loans and experienced better employment outcomes relative to localities with a low share of government banks. While increased government bank lending mitigated an economic downturn, we find that this lending was politically targeted, inefficiently allocated, and reduced productivity growth.     

Bank performance and convergence during the financial crisis: Evidence from the ‘old’ European Union and Eurozone

This paper investigates the process of banking integration in the EU15 countries and the Eurozone by testing for convergence in bank efficiency among commercial banks. We use a two-step approach: First we estimate efficiency by applying an innovative methodological approach that treats banks’ non-performing loans as an undesirable output. Second, we apply the Phillips and Sul (2007) panel convergence methodology to assess the convergence process in European banking. Our results indicate an overall decline in efficiency and no evidence of group convergence following the financial crisis. However, we find the presence of club formation with typically weak convergence. The heterogeneity displayed by the transition parameters for the individual countries and the notable decrease in competition levels post 2008 highlight the impact of the financial crisis on the integration process.     

Information Asymmetry and Voluntary SFAS 157 Fair Value Disclosures by Bank Holding Companies During the 2007 Financial Crisis

We hand‐collect SFAS 157 voluntary fair value disclosures of 18 bank holding companies. The SEC's Division of Corporate Finance likely targeted these entities in 2008 through their “Dear CFO” letters in which they requested specific, additional disclosure items. We collect disclosures that match the SEC recommendations and create eight common factor disclosure variables to examine the effect of such disclosures on information asymmetry. We find that disclosure variables about the use of broker quotes or prices from pricing services and the use of market indices and illiquidity adjustments are related to lower information asymmetry. However, disclosure variables about valuation techniques and asset‐backed securities are related to greater information asymmetry. We also document that disclosure complexity, and disclosure tone (uncertainty and litigious) is related to greater information asymmetry. These findings are consistent with criticism that corporate disclosures are voluminous; management may obfuscate unfavorable information which in turn increases market participants’ assessment of uncertainty associated with the fair value measures. We caveat that the setting of the financial crisis and a small sample size may limit the ability to generalize these inferences to other time periods or other financial firms.