Intra-Industry Effects of a Regulatory Shift: Capital Market Evidence from Penn Square

In this paper, we use stock market data to examine the intra-industry effects of the July 5, 1982, closure of the Penn Square bank. A sample of 54 bank stocks is divided into four portfolios: industry, money center, Texas, and upstream. The latter group consists of banks that had purchased loans directly from Penn Square. Our objective is to determine whether FDIC Chairman Isaac's decision to close, rather than merge, Penn Square had an industry-wide contagion effect or a firm-specific information effect. We conclude that the stock market reaction to the Penn Square closure represents a rational investor response to new bank-specific information.