The Impact of Government Intervention in Banks on Corporate Borrowers’ Stock Returns

55 Pages Posted: 14 Mar 2012

See all articles by Lars Norden

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE); Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças

Peter Roosenboom

Rotterdam School of Management, Erasmus University; Erasmus Research Institute of Management (ERIM)

Teng Wang

Board of Governors of the Federal Reserve System

Date Written: March 12, 2012

Abstract

Moving into and out of a financial and banking crisis is likely to be associated with spillover effects from the banking sector to the corporate sector. We investigate whether and how government interventions in the U.S. banking sector influence the stock market performance of corporate borrowers during the financial crisis of 2007-2009. We measure firms’ exposures to government interventions with an intervention score that is based on combined information on the firms’ structure of bank relationships and their banks’ participation in government capital support programs. We find that government capital infusions in banks have a significantly positive impact on borrowing firms’ stock returns. The effect is more pronounced for riskier and bank-dependent firms and those that borrow from banks that are less capitalized and smaller. Our study highlights positive effects from government interventions during the crisis, documenting that an alleviation of financial shocks to banks has led to significantly positive valuation effects in the corporate sector.

Keywords: Bank loans, bank-firm relationships, stock markets, banking crisis, government intervention

JEL Classification: G10, G21, G28, G32

Suggested Citation

Norden, Lars and Roosenboom, Peter and Wang, Teng, The Impact of Government Intervention in Banks on Corporate Borrowers’ Stock Returns (March 12, 2012). Available at SSRN: https://ssrn.com/abstract=2021134 or http://dx.doi.org/10.2139/ssrn.2021134

Lars Norden

Getulio Vargas Foundation (FGV) - Brazilian School of Public and Business Administration (EBAPE) ( email )

Rua Jornalista Orlando Dantas 30
Rio de Janeiro, 22231-010
Brazil
+552130832431 (Phone)

HOME PAGE: http://www.larsnorden.de

Getulio Vargas Foundation (FGV) - FGV/EPGE Escola Brasileira de Economia e Finanças ( email )

Praia de Botafogo 190/1125, CEP
Rio de Janeiro RJ 22253-900
Brazil

Peter Roosenboom

Rotterdam School of Management, Erasmus University ( email )

P.O. Box 1738
Room T09-56
3000 DR Rotterdam
Netherlands
+31 10 40 82255 (Phone)

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

Teng Wang (Contact Author)

Board of Governors of the Federal Reserve System ( email )

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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