The reaction of bank stock prices to news of derivatives losses by corporate clients |
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| Affiliation: | 1. Department of Banking and Finance, Terry College of Business, The University of Georgia, Athens, GA 30602-6253, USA;2. Department of Finance, College of Business Administration, Oklahoma State University, Stillwater, OK 74078, USA;1. Department of Electrical Engineering, Hakim Sabzevari University, Sabzevar, Iran;2. Department of Electrical Engineering, Semnan University, Semnan, Iran;1. School of Public Administration, Hohai University, NO.8 Fochengxilu, Jiangning District, Nanjing, 211100, Jiangsu, China;2. Social Policy Research Centre, The University of New South Wales, Australia;3. School of Public Administration, Nanjing University of Finance & Economics, No. 3 Wenyuan Road, Nanjing, 210023, Jiangsu, China;4. Institute of Social Security, Nanjing University of Finance & Economics, No. 3 Wenyuan Road, Nanjing, 210023, Jiangsu, China;1. Universiti Tunku Abdul Rahman, Department of Chemical Engineering, Jalan Sungai Long, Bandar Sungai Long, Cheras, 43000, Kajang, Selangor, Malaysia;2. Chemical Engineering Department, Faculty of Engineering, Computing and Science, Swinburne University of Technology, Jalan Simpang Tiga, 93350, Kuching, Sarawak, Malaysia;3. Curtin University Malaysia, Department of Chemical Engineering, CDT 250, 98009, Miri, Sarawak, Malaysia;4. The University of Nottingham Malaysia Campus, Department of Chemical and Environmental Engineering, Jalan Broga, 43500, Semenyih, Selangor, Malaysia |
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| Abstract: | From March through May of 1994, several large nonfinancial firms announced millions of dollars in losses from derivatives deals, especially those arranged by Bankers Trust. Accompanying these announcements and related news stories were allegations that Bankers Trust had either misrepresented, lied, or deceived its clients. Using SUR methods, we investigate how these announcements affected Bankers Trust and three portfolios of banks: dealers, nondealers, and nonusers. Our results indicate significant cumulative abnormal returns of −12.14% (Bankers Trust), −5.56% (13 dealer banks), and −2.45% (32 nondealer, user banks). The evidence suggests an intra-industry, information-transfer effect consistent with rational pricing. The replacement cost of derivative contracts is an important factor in explaining the variation in abnormal returns across banks. |
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