CDS and Equity Market Reactions to Stock Issuances in the U.S. Financial Industry: Evidence from the 2002-13 Period

39 Pages Posted: 11 Nov 2014 Last revised: 26 Nov 2014

See all articles by Marcia Millon Cornett

Marcia Millon Cornett

Bentley University - Department of Finance

Hamid Mehran

Independent

Kevin Pan

Harvard University, Department of Economics, Students

Minh Phan

Columbia University; Columbia University - Columbia Business School

Chenyang (Jason) Wei

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

Date Written: November 1, 2014

Abstract

We study market reactions to seasoned equity issuances that were announced by financial companies between 2002 and 2013. To assess the risk and valuation implications of these seasoned equity issuances, we conduct an event analysis using daily credit default swap (CDS) and stock market pricing data. The major findings of the paper are that CDS prices respond quickly to new, default-relevant information. Over the full sample period, cumulative abnormal CDS spreads drop in response to equity issuance announcements. The reactions are significantly stronger during the financial crisis. At that time, the federal government injected equity into financial institutions to ensure their viability. The market reacted to the equity issue announcements by assessing significantly lower costs for default protection via credit default swaps. The evidence indicates that single-name CDS based on financial firms’ default probabilities are potentially useful for private investors and regulators.

Keywords: financial institutions, stock issuance, credit default swaps, financial crisis

JEL Classification: G01, G21, G32

Suggested Citation

Cornett, Marcia Millon and Mehran, Hamid and Pan, Kevin and Phan, Minh and Phan, Minh and Wei, Chenyang, CDS and Equity Market Reactions to Stock Issuances in the U.S. Financial Industry: Evidence from the 2002-13 Period (November 1, 2014). FRB of New York Staff Report No. 697, Available at SSRN: https://ssrn.com/abstract=2521615 or http://dx.doi.org/10.2139/ssrn.2521615

Marcia Millon Cornett

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

Kevin Pan

Harvard University, Department of Economics, Students ( email )

Cambridge, MA
United States

Minh Phan

Columbia University - Columbia Business School ( email )

3022 Broadway
New York, NY 10027
United States

Columbia University ( email )

3022 Broadway
New York, NY 10027
United States

Chenyang Wei

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

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

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