Stock Repurchases and TARP in the Financial Industry
41 Pages Posted: 21 Aug 2010 Last revised: 6 Nov 2010
Date Written: August 19, 2010
In this paper, we examine the relation between the inadequate levels of capital during the recent financial crisis and the shareholder dividend and stock repurchase activities in the banking industry. In 2008, the Treasury Department initiated a bailout of the banking industry through the Troubled Asset Relief Program (TARP). Over the years leading up to this bailout, 2004-2007, shareholder payout activity increased dramatically. We first explore the efficient capital market motivations for the share repurchases of our sample of banking firms. Consistent with studies in the non-financial industry we find some support for the excess cash, undervaluation, and stock compensation hypotheses. However, we observe a structural shift in the model in 2007 that is inconsistent with efficient capital market behavior. Next, we explore the relation between firms that accepted funds from the Capital Purchase Program (CPP), the largest program within TARP, and the increasing levels of shareholder payouts. We find that firms that accepted CPP funds returned a higher proportion of their available capital to shareholders in the periods leading up to the financial crisis than firms that did not accept CPP funding. Finally, we document the improvement in for the capital adequacy of the CPP participant firms, and we provide anecdotal evidence on the impact of CPP on the largest four participating banks.
Keywords: Share Repurchases, Banking Firms
JEL Classification: G21, G35
Suggested Citation: Suggested Citation