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

44 Pages Posted: 25 May 2013

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

Multiple version iconThere are 2 versions of this paper

Date Written: May 3, 2013

Abstract

We examine investors’ reactions to announcements of large capital infusions by U.S. financial institutions (FIs) from 2000 to 2009. These infusions include private market infusions (seasoned equity offerings (SEOs)) 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. We present evidence on the factors affecting FIs’ decisions to raise capital, the determinants of investor reactions, and post-infusion risk-taking of the recipients, as well as a sample of matching FIs. 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, and the stage of the business cycle. More financially constrained institutions were more likely to have raised capital through private market offerings during the period prior to TARP, and firms receiving a TARP injection tended to be riskier and more levered. In the case of TARP recipients, they appeared to finance an increase in lending (as a share of assets) with more stable financing sources such as core deposits, which lowered their liquidity risk. However, we 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 (May 3, 2013). FRB of Philadelphia Working Paper No. 13-23. Available at SSRN: https://ssrn.com/abstract=2269223 or http://dx.doi.org/10.2139/ssrn.2269223

Elyas Elyasiani (Contact Author)

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

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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