The Effect of State Pension Cut Legislation on Bank Values and Operations
Lee J. Cohen
University of Georgia - Department of Finance
Marcia Millon Cornett
Bentley University - Department of Finance
Federal Reserve Bank of New York
Boston College - Department of Finance
December 11, 2014
This study provides an empirical analysis of the impact of Wisconsin and Ohio pension cut legislation on values of banks operating in Wisconsin and Ohio, banks operating in other states in which pension cut legislation was being considered as Wisconsin and Ohio went through its legislative process, and all publicly traded U.S. banks. We find that banks doing business in Wisconsin and Ohio experience positive (negative) stock price reactions to announcements that indicate an increased (a decreased) probability of pension cut legislation. The stock price reactions are positively related to the extent to which banks operate in Wisconsin and Ohio. Stock price reactions are rarely evident for banks in the other 13 states that were considering pension cut legislation during the period of analysis. We also find municipal bond spreads tighten and bank credit supply increases with pension cut legislation. Overall, the findings suggest states’ budget cuts affect bank values and credit supply through their municipal bond holdings.
Number of Pages in PDF File: 59
Keywords: Financial institutions, municipal debt, public pensions
JEL Classification: G11, G21, H72, H75
Date posted: October 10, 2012 ; Last revised: December 12, 2014
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