Tests of Global Flights to Safety with US Financial Firm Bankruptcy Announcements

54 Pages Posted: 17 Jan 2024

See all articles by Panayiotis Papakyriakou

Panayiotis Papakyriakou

University of Southampton - Department of Banking and Finance

Theodosis L. Kallenos

University of Cyprus-School of Economics and Management- Department of Accounting and Finance

Athanasios Sakkas

Athens University of Economics and Business - Department of Accounting and Finance

Zenon Taoushianis

University of Southampton - Department of Banking and Finance

Date Written: January 9, 2024

Abstract

This paper investigates whether bankruptcy announcements by large US financial institutions can induce flights to safety, leading investors to seek safer investments. To test this relationship, we employ a short-horizon event study methodology and show that low-risk investments—such as the US dollar, sovereign bonds and gold—exhibit significant appreciation following such announcements. This result is more pronounced when the local country-level investor sentiment declines in the post-announcement period. We also analyze the transmission mechanism through which bankruptcy announcements cause flights to safety and empirically identify a global information contagion channel via negative shocks to the cash flows of stocks. Our results are robust to several additional tests. These include removing the most influential bankruptcies from the sample of events, using more sophisticated event-study methodologies, and conducting a placebo test with random dates.

Keywords: financial firms, bankruptcy announcements, low-risk investments, global information contagion, sentiment

JEL Classification: G14, G15, F31, G33

Suggested Citation

Papakyriakou, Panayiotis and Kallenos, Theodosis L. and Sakkas, Athanasios and Taoushianis, Zenon, Tests of Global Flights to Safety with US Financial Firm Bankruptcy Announcements (January 9, 2024). Available at SSRN: https://ssrn.com/abstract=4689374 or http://dx.doi.org/10.2139/ssrn.4689374

Panayiotis Papakyriakou (Contact Author)

University of Southampton - Department of Banking and Finance ( email )

Southampton
United Kingdom

Theodosis L. Kallenos

University of Cyprus-School of Economics and Management- Department of Accounting and Finance ( email )

1 University Avenue
P.O. Box 20537
Nicosia, CY-1678
Cyprus
+35722893628 (Phone)
+35722895475 (Fax)

Athanasios Sakkas

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Zenon Taoushianis

University of Southampton - Department of Banking and Finance ( email )

Southampton
United Kingdom

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