SEOs by Systemically Risky Banks: Do They Produce Stabilization Effects?

Abstract

Analyzing the stock return reaction for issuing and non-issuing US banks, we explore the systemic effects of seasoned equity offerings (SEOs) by systemically risky banks. We find that SEOs do not generate value benefits for systemically risky issuers. In contrast, non-issuers’ stock returns react positively when systemically risky banks raise equity, although less so in times of systemic distress. The benefits for non-issuers are amplified by more business similarity with the systemically risky issuer and sustain in the longer term. Our findings reflect positive systemic externalities from a reduced deleveraging risk of the issuer. Overall, our analysis justifies regulatory pressure on systemically risky banks to implement countercyclical recapitalization through SEOs, especially in more homogenous banking systems.

Keywords: SEOs, Banking Regulation, Banking Crises, Contagion, Systemic Risk

JEL Classification: G21, G28, G32