Large Capital Infusions, Investor Reactions, and the Return and Risk Performance of Financial Institutions Over the Business Cycle and Recent Financial Crisis

37 Pages Posted: 12 Oct 2011 Last revised: 10 Dec 2015

See all articles by Elyas Elyasiani

Elyas Elyasiani

Temple University - Department of Finance

Loretta J. Mester

Federal Reserve Banks - Federal Reserve Bank of Cleveland; University of Pennsylvania - The Wharton School

Michael S. Pagano

Villanova University - Villanova School of Business

Date Written: September 30, 2011

Abstract

The authors examine investors' reactions to announcements of large seasoned equity offerings (SEOs) by U.S. financial institutions (FIs) from 2000 to 2009. These offerings include market infusions as well as injections of government capital under the Troubled Asset Relief Program (TARP). The sample period covers both business cycle expansions and contractions, and the recent financial crisis. They present evidence on the factors affecting FI decisions to issue capital, the determinants of investor reactions, and post-SEO performance of issuers as well as a sample of matching FIs. The authors find that investors reacted negatively to the news of private market SEOs by FIs, both in the immediate term (e.g., the two days surrounding the announcement) and over the subsequent year, but positively to TARP injections. Reactions differed depending on the characteristics of the FIs, stage of the business cycle, and conditions of financial crisis. Larger institutions were less likely to have raised capital through market offerings during the period prior to TARP, and firms receiving a TARP injection tended to be larger than other issuers. The authors find that while TARP may have allowed FIs to increase their lending (as a share of assets) in the year after the issuance, they took on more credit risk to do so. They find no evidence that banks' capital adequacy increased after the capital injections.

Keywords: Securities Issuance, Market Reaction, Financial Service Firms, Commercial Banks, Government Intervention

JEL Classification: F3, G15

Suggested Citation

Elyasiani, Elyas and Mester, Loretta J. and Pagano, Michael S., Large Capital Infusions, Investor Reactions, and the Return and Risk Performance of Financial Institutions Over the Business Cycle and Recent Financial Crisis (September 30, 2011). FRB of Philadelphia Working Paper No. 11-46. Available at SSRN: https://ssrn.com/abstract=1942323 or http://dx.doi.org/10.2139/ssrn.1942323

Elyas Elyasiani

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
United States
215-204-5881 (Phone)
215-204-5698 (Fax)

Loretta J. Mester (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Cleveland ( email )

East 6th & Superior
Cleveland, OH 44101-1387
United States

University of Pennsylvania - The Wharton School

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Michael S. Pagano

Villanova University - Villanova School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States
(610) 519-4389 (Phone)

HOME PAGE: http://www90.homepage.villanova.edu/michael.pagano

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