Intra-Industry Contagion Effects of Earnings Surprises in the Banking Sector

31 Pages Posted: 2 Feb 2010 Last revised: 26 Apr 2012

See all articles by Marcel Prokopczuk

Marcel Prokopczuk

Leibniz Universität Hannover - Faculty of Economics and Management; University of Reading - ICMA Centre

Date Written: September 2, 2009

Abstract

In this paper we investigate whether contagion is present in the banking sector by analyzing how banks are affected by negative earnings surprises from their competitors. The banking sector is of crucial importance for the economy and, thus, highly regulated on an individual bank level. However, a high degree of contagion risk should call for a regulation of the financial network rather than solely regulating on an individual level. To be able to make a judgement about the magnitude of possible contagion effects we compare the results of the banking sector with the results of the non-banking industries. We find that earnings surprises cause significant contagion in the banking sector. In contrast, we do not find this effect in the non-banking sectors, including the insurance sector. The magnitude of contagion in the banking sector is positively related with the size of the bank reporting an earnings surprise, as well as the size of the affected banks.

Keywords: Intra-Industry Contagion, Banking Sector, Systemic Risk, Earnings Surprises, Event Study

JEL Classification: G14, G21, G28

Suggested Citation

Prokopczuk, Marcel, Intra-Industry Contagion Effects of Earnings Surprises in the Banking Sector (September 2, 2009). Applied Financial Economics, Vol. 20, No. 20, 2010, Available at SSRN: https://ssrn.com/abstract=1546468 or http://dx.doi.org/10.2139/ssrn.1546468

Marcel Prokopczuk (Contact Author)

Leibniz Universität Hannover - Faculty of Economics and Management ( email )

Koenigsworther Platz 1
Hannover, 30167
Germany

University of Reading - ICMA Centre ( email )

Whiteknights Park
P.O. Box 242
Reading RG6 6BA
United Kingdom

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