'Stocks Demand Curves and TARP Returns'

Abstract

This study uses a unique natural experiment to contribute to the long-running debate as to whether the demand curves for stocks slope downward. The U.S. Treasury sold 5.27 billion shares of Citigroup’s common stock during trading hours in April 26, 2010, to December 6, 2010. Using a geometric Brownian motion model of the stock price, there is some evidence that the demand curve for Citigroup’s stock has a negative slope. There was a weakly significant drop in the stock price at the announcement of the sale and a weakly significant rise in the stock price just after it ended. This indicates that potential “dribble-out” privatizations of AIG, General Motors, Chrysler Motors, and Ally Financial may depress those firms’ stock prices temporarily, eating into taxpayers’ returns from those bailout investments.

Keywords: Bailout, Banks, Bank of America, Block Trades, Brownian Motion, Chrysler, Citigroup, Demand Curves, General Motors, GMAC, Privatization, Troubled Asset Relief Program, TARP, Secondary Offerings, SEOs, U.S. Treasury

JEL Classification: G01, G13, G21, G28, G32