The Long-Run Impact of Government Asset Guarantees

Abstract

Using a proprietary FDIC database of all failed bank auction participants, I provide one of the first studies of Shared-Loss Agreements (SLAs), where the FDIC absorbs 80% of failed banks' losses for their acquirers. In the three years post-acquisition, acquirers with SLAs underperform acquirers without SLAs and auction losers. This divergence in long-run returns is not fully explained by a reduction in the SLA acquirers' downside risk or their winner's curse in competitive bidding. Instead, SLA acquirers experience unanticipated earnings shocks and deliver negative earnings surprises. While early SLA acquirers have higher announcement day returns than late ones, this trend reverses in the long run, suggesting that the costs and benefits of SLAs may not align with initial market expectations. Overall, this study provides insights into SLAs' implications for acquiring entities and suggests that asset guarantees may carry unexpected consequences that should be considered in shaping financial policies during crises.

Keywords: financial institutions, regulation, market efficiency, auctions

JEL Classification: G01, G14, G21, G28, D44