Regulatory Uncertainty and Financial Contagion: Evidence from the Hybrid Capital Securities Market

42 Pages Posted: 10 Jan 2011

See all articles by John D. Finnerty

John D. Finnerty

Finnerty Economic Consulting LLC; Fordham University - Finance Area

Jeffrey Turner

Finnerty Economic Consulting LLC

Jack Chen

affiliation not provided to SSRN

Rachael W. Park

affiliation not provided to SSRN

Date Written: January 7, 2011

Abstract

This paper examines the negative market impact that resulted from the insurance regulators potential reclassification of 140 hybrid capital securities in spring and summer 2006. It illustrates how financial contagion can spring from a regulatory policy change that lacks transparency. We investigate the impact of the uncertainty surrounding the regulators true classification criteria by measuring the effect of the reclassification announcements on hybrid new issue volume, cumulative average abnormal returns, bid-ask spreads, and yield spreads. The financial contagion adversely affected the entire hybrid capital securities market for six months. The effect was most pronounced among those hybrids that were eventually reclassified as common equity equivalents. It was greater for Yankee Tier 1 hybrids, which had been more popular with insurance firm investors prior to the reclassifications, than among non-Tier 1 hybrids.

Keywords: hybrid capital securities, illiquid securities, contagion, learning hypothesis

JEL Classification: G12, G14

Suggested Citation

Finnerty, John D. and Turner, Jeffrey and Chen, Jack and Park, Rachael W., Regulatory Uncertainty and Financial Contagion: Evidence from the Hybrid Capital Securities Market (January 7, 2011). Financial Review, Vol. 46, Issue 1, pp. 1-42, 2011. Available at SSRN: https://ssrn.com/abstract=1736910 or http://dx.doi.org/10.1111/j.1540-6288.2010.00288.x

John D. Finnerty (Contact Author)

Finnerty Economic Consulting LLC ( email )

60 East 42nd Street
Suite 2910
New York, NY 10165
United States
2125991640 (Phone)
2125991242 (Fax)

HOME PAGE: http://www.finnecon.com

Fordham University - Finance Area ( email )

113 West 60th Street
New York, NY 10023
United States
2125991640 (Phone)
2125991242 (Fax)

HOME PAGE: http://www.finnecon.com

Jeffrey Turner

Finnerty Economic Consulting LLC ( email )

60 East 42nd Street
Suite 2910
New York, NY 10165
United States

Jack Chen

affiliation not provided to SSRN

Rachael W. Park

affiliation not provided to SSRN

No Address Available

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