Asymmetric Information, Dividend Reductions, and Contagion Effects in Bank Stock Returns
25 Pages Posted: 6 Sep 2000
Abstract
In an environment of asymmetric information, banks face information externalities due to their role as intermediaries of information. In particular, bank insiders will possess private information from monitoring loan customers. Accordingly, outsiders may interpret changes in a bank's financial policy as signals about the quality of its loan portfolio and to the extent that the assets (loans) of different banks are viewed as similar, they will interpret such signals as pertaining to non-announcing banks as well leading to contagion effects. We test for the presence of contagion effects in stock returns associated with announcements of dividend cuts by money-center banks. We find that dividend cuts induce negative abnormal returns in the stocks of non-announcing money-center banks and to a lesser extent in the stocks of large regional banks. The observed contagion effects appear consistent with informed rather than contagious panic behavior because these effects are systematically related to risks that are common to all affected banks.
Keywords: Asymmetric Information, Intra-Industry Effects, Dividend Announcements, Valuation Effects, Financial Intermedation
JEL Classification: G14, G21, G25
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Change in Market Assessments of Deposit-Institution Riskiness
By Edward J. Kane and Haluk Unal
-
The Sensitivity of Bank Stock Returns to Market, Interest and Exchange Rate Risks
By Jongmoo Jay Choi, Elyas Elyasiani, ...
-
By Gary B. Gorton and Richard J. Rosen
-
By Elyas Elyasiani and Iqbal Mansur
-
Modeling Structural and Temporal Variation in the Market's Valuation of Banking Firms
By Edward J. Kane and Haluk Unal
-
The Exchange Rate Exposure of U.S. And Japanese Banking Institutions
By Helen Popper, Sandra Chamberlain, ...
-
Derivative Exposure and the Interest Rate and Exchange Rate Risks of U.S. Banks
By Elyas Elyasiani and Jongmoo Jay Choi
-
Risk and Market Segmentation in Financial Intermediaries' Returns
By Linda Allen and Julapa Jagtiani