THE EFFECT OF THE FEDERAL DEPOSIT INSURANCE CORPORATION IMPROVEMENT ACT OF 1991 ON BANK STOCKS

In this study we use a multivariate regression model to investigate the effect of the passage of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991 on returns to the shareholders of bank-holding companies. The empirical results suggest that the shareholders of well-capitalized banks benefited from the enactment of the FDICIA, while those of undercapitalized banks experienced significant losses during the announcement period. However, the shareholders of adequately capitalized banks did not gain or lose significantly from the enactment of the FDICIA. The FDICIA also affected stock returns of large and small bank-holding companies similarly.     

THE EFFECT OF SIZE,BOOK-TO-MARKET EQUITY,PRIOR RETURNS,AND BETA ON STOCK RETURNS: JANUARY VERSUS THE REMAINDER OF THE YEAR

Size and book-to-market equity are shown to transcend beta in explaining stock returns. One possible explanation of the book-to-market equity effect is overreaction. We investigate the effect of size, book-to-market equity, prior returns, and beta on stock returns. We find significant reversals in January consistent with overreaction. We find a strong positive relation between returns and prior returns for February through December. Both patterns are distinct from either a size or book-to-market equity effect. Book-to-market equity is significantly related to returns, with some evidence of a stronger effect in January.     

THE IMPACT OF CREDITWATCH PLACEMENT ON EQUITY RETURNS AND BOND PRICES

This paper examines the equity returns and bond prices of firms around the dates of their placement on CreditWatch by Standard and Poor's. Bond prices and equity returns for companies listed on CreditWatch are compared with a set of firms whose debt was rerated during the same time period but were never placed on CreditWatch. The evidence indicates no market reaction when firms are listed on CreditWatch with subsequent rating affirmations, but a significant reaction exists in those cases where the listing was followed by downgradings. Furthermore, the bond market does not appear so efficient as the stock market since relative bond prices continue to decline as long as seven months after a rating change.     

THE IMPACT OF UNEXPECTED EARNINGS AND DIVIDENDS ON ABNORMAL RETURNS TO EQUITY

This paper contributes to the empirical literature which documents the existence of a positive association between unexpected earnings and/or dividend announcements and abnormal returns to equity. The paper addresses some of the methodological limitations evident in the literature. In particular, one methodological difficulty encountered by previous studies is that since earnings and dividend announcements are usually made contemporaneously it is difficult to assess the marginal effect of either announcement on security returns. This problem is dealt with by constructing portfolios of securities which are randomized with respect to unexpected earnings (dividends), but which are systematically ranked on unexpected dividends (earnings). The results indicate that unexpected earnings announcements have a significant marginal impact on abnormal returns. In addition, there is evidence of an impact of unexpected dividends on returns, but it is weaker than unexpected earnings.     

THE EFFECT OF RATE CASES ON PUBLIC UTILITY STOCK RETURNS

Public utility rate cases are economic events because they affect the intrinsic value of the utility. This paper examines the effect of rate cases on public utility stock returns. “Average” rate cases do not appear to affect the utilities' value, but “above-average” and “below-average” settlements cause positive or negative adjustments, respectively.     

THE EFFECT OF FDICIA REGULATION ON BANK HOLDING COMPANIES

We examine market reactions to legislative announcements surrounding the passage of the Federal Deposit Insurance Corporation Improvement Act (FDICIA) of 1991. Research shows that bank regulation adversely affects shareholder wealth on the one hand, yet often provides government subsidies on the other. The removal of Federal regulators' discretionary authority and the imposition of mandatory regulations in the FDICIA have an overall negative effect on our sample of bank holding companies. The results are consistent with either the costly regulation hypothesis or the decreased subsidies hypothesis.     

ROBUSTNESS OF THE HEADQUARTERS‐CITY EFFECT ON STOCK RETURNS

Recent studies report that U.S. firms headquartered near each other experience positive comovement in their stock returns, a finding suggestive of local biases in equity trading activity. We investigate the robustness of these findings and find that including additional pricing factors in models for monthly stock returns materially reduces the magnitude of the headquarters‐city effect in stock returns. Additionally, we find that an implicit null hypothesis of zero local return comovement is inappropriate as there is positive comovement between a stock's return and returns on portfolios of stocks from nonheadquarters cities, on average. Nevertheless, results benchmarked against estimates based on resampling methods indicate a significant and robust headquarters‐city effect in stock returns.     

A LIKELIHOOD RATIO TEST OF THE ZERO-BETA CAPM IN AUSTRALIAN EQUITY RETURNS

This paper tests the zero-beta CAPM with Australian equity returns, using the multivariate approach developed by Gibbons (1982). For the period 1958 to 1987, based on its asymptotic distribution, the likelihood ratio test (LRT) statistic indicates a strong rejection of the model when an equally weighted market index is used. However, small sample adjustments to the test suggested by Jobson and Korkie (1982) and by Shanken (1985) place the validity of this conclusion in some doubt. When a value weighted market index is used for the period 1974 to 1987, the tests reveal at least moderate support for the zero-beta CAPM.