A generalized method for detecting abnormal returns and changes in systematic risk

The authors generalize traditional event-study techniques to allow for event-induced parameter shifts, shifting variances, and firm-specific event periods. Their method, which nests traditional methods, also permits systematic risk to change gradually during the event period and exit the period at higher or lower levels. The authors use their approach to study 132 banks that acquired other institutions between 1989 and 1995. The authors find a significant change in the systematic risk of the acquiring firms, significant ARCH effects, and an event period that ends before the date of the announcement. None of these results is detectable using conventional methods. These results imply that (1) event studies that cannot account for information leakage may be biased, and (2) changes in systematic risk can occur in the absence of abnormal returns, and (3) regulators, investors and bank managers must evaluate each acquisition on its own merits; reliance on averages can mask important distinctions across acquisitions.Bank mergers ; Econometric models ; Risk

On the pervasive effects of Federal Reserve settlement regulations

To manage their reserve positions, depository institutions in the United States actively buy and sell deposits at the Federal Reserve Banks via the federal funds market. Beginning in 1991, the Eurodollar market also became an attractive venue for trading deposits at the Federal Reserve Banks. Prior to 1991, the Federal Reserve’s statutory reserve requirement on Eurocurrency liabilities of U.S. banking offices discouraged use of Eurocurrency liabilities as a vehicle for trading deposits at the Federal Reserve. This impediment was removed in December 1990. Beginning in January 1991, the overnight instruments in the federal funds market and in the Eurodollar markets, except for minor differences in risk, became similar vehicles for exchanging deposits at Federal Reserve Banks. Because the risk characteristics of the instruments differ, the law of one price need not hold precisely across the two markets. Yet, the authors hypothesize that, beginning in 1991, the two trading instruments became close enough substitutes that price pressures in one market began to show through to the other. Herein, the authors examine overnight LIBOR for U.S. bank settlement effects. During the period when the federal funds market and Eurodollar markets are similar venues for trading deposits at Federal Reserve Banks, they find strong settlement effects in overnight LIBOR. However, during the period when Eurocurrency liabilities carry a reserve tax, they find no evidence of a settlement effect in overnight LIBOR. Their results suggest that (i) the microstructure of the federal funds market spills over into the markets for substitute assets and (ii) Federal Reserve rules have implications beyond U.S. borders.Federal funds market (United States) ; Euro-dollar market ; Money market funds

A generalized method for detecting abnormal returns and changes in systematic risk

The authors generalize traditional event-study techniques to allow for event-induced parameter shifts, shifting variances, and firm-specific event periods. Their method, which nests traditional methods, also permits systematic risk to change gradually during the event period and exit the period at higher or lower levels. The authors use their approach to study 132 banks that acquired other institutions between 1989 and 1995. The authors find a significant change in the systematic risk of the acquiring firms, significant ARCH effects, and an event period that ends before the date of the announcement. None of these results is detectable using conventional methods. These results imply that (1) event studies that cannot account for information leakage may be biased, and (2) changes in systematic risk can occur in the absence of abnormal returns, and (3) regulators, investors and bank managers must evaluate each acquisition on its own merits; reliance on averages can mask important distinctions across acquisitions

Determinants and effects of growth strategies in the banking industry

This dissertation examines the linkage between growth choice and changes in performance. Banks are assigned growth strategies of branching, bank acquisition, and/or product expansion. The Any Activity Method assigns banks a given strategy for one or more application(s) to the Federal Reserve for a particular growth activity. The Primary Activity Method assigns strategies only if the proportion of the activity is greater than 25 percent of all activity. Strategies are assigned for the 1983 to 1988 and the 1986 to 1991 time periods, and changes in performance calculated in the 1989 to 1991 and 1992 to 1994 periods respectively. Market model results indicate negative and significant cumulative average residuals for the entire sample of publicly traded banks. A significant difference is found between banks that incorporate branching and those that acquire banks and product expand, indicating the market values branching. Operating performance models indicate bank acquirers have significantly lower changes in performance than the average bank from 1989 to 1991 using the Any Activity Method. Using the Primary Activity Method, banks that branch have significantly lower changes in profit margin. In seven out of twelve models, size is positively related to performance. In every model, the change in the capital ratio is positive and significant. In eight out of twelve models, the change in demand deposits is positive and significantly related to performance. De novo banks are tested separately to mitigate the problem of ignoring strategic choices that occur in prior periods. De novo banks that branch have positive and significant changes in ROA and profit margin using the Primary Activity Method. The changes in asset size, loan to assets, and bank deposit concentration are significant and positively related to changes in performance. The change in charge-offs to assets is negative and significantly related to changes in performance. A multinomial logistic model is used to discover determinants of growth choice. The model allows for simultaneous consideration of the three growth choices. During both strategic determination periods, multi-bank holding companies are more likely to Bank Acquire than Branch, or separately to Product Expand. De novo banks are more likely to branch that any other growth strategy in both time periods. Federally chartered banks are more likely to Bank Acquire or Product Expand as compared to Branch. Banks with assets over $1 billion are more likely to Branch than to Bank Acquire in every model. Significant performance variables indicate that performance is a determinant of growth choice in the 1986 to 1991 period. The statewide branching binary variable is positive and significant in most multinomial models for the Bank Acquire and Product Expand relative to Branch equations

An Event Study Analysis of Too-Big-to-Fail After the Dodd-Frank Act: Who is Too Big to Fail?

One feature of the Dodd-Frank Act is the elimination of too-big-to-fail (TBTF) banks. TBTF is a government guarantee of large banks that has been shown to increase the value of these banks, so removing the guarantee should result in a price decline of TBTF bank stock. Using event study methods, we find very limited reaction to the process of eliminating TBTF. Specifically, there is limited reaction among the largest banks and banks receiving special attention, such as Systemically Important Financial Institutions (SIFI) banks. Instead, smaller banks not receiving special attention show some evidence of negative returns with the elimination of TBTF

Stock price reaction to profit warnings: The role of time-varying betas

This study investigates the role of time-varying betas, event-induced variance and conditional heteroskedasticity in the estimation of abnormal returns around important news announcements. Our analysis is based on the stock price reaction to profit warnings issued by a sample of firms listed on the Hong Kong Stock Exchange. The standard event study methodology indicates the presence of price reversal patterns following both positive and negative warnings. However, incorporating time-varying betas, event-induced variance and conditional heteroskedasticity in the modelling process results in post-negative-warning price patterns that are consistent with the predictions of the efficient market hypothesis. These adjustments also cause the statistical significance of some post-positive-warning cumulative abnormal returns to disappear and their magnitude to drop to an extent that minor transaction costs would eliminate the profitability of the contrarian strategy

What drives acquisitions in the EU banking industry? The role of bank regulation and supervision framework, bank specific and market specific factors

We investigate the determinants of commercial bank acquisitions in the former fifteen countries of the European Union by evaluating the impact of bank-specific measures, such as size, growth and efficiency of banks, and external influences reflecting industry level differences in the regulatory and supervision framework, market environment and economic conditions. Our empirical analysis involves multinomial logit estimation at various levels in order to identify those characteristics that most consistently predict targets and acquirers from a sample of over 1400 commercial banks. The overall results indicate that, relative to banks that were not involved in the acquisitions, (i) targets and acquirers were significantly larger, less well capitalized and less cost efficient, (ii) targets were less profitable with lower growth prospects, and acquirers more profitable with higher growth prospects, (iii) external factors have affected targets and acquirers differently, and their effects have not been consistent or robust to sample size changes. © 2011 New York University Salomon Center and Wiley Periodicals, Inc.

The impact of multilateral trading facilities on price discovery

Our study aims to examine whether market segmentation and competition manifested in the proliferation of multilateral trading facilities (MTFs) improve market quality after the implementation of MiFID. To do this, we employ the Common Factor Weight and Weighted Price Contribution methods to study relative price discovery for three major MTFs—LSE, BATS, and Turquoise, using intra-day, five-minute transaction prices. The results suggest that the two trading venues, BATS and Turquoise, contribute more to impounding fundamental information, implying a shift in price dominance from traditional LSE to MTFs. In addition, the intra-day price contributions of MTFs are higher than those of LSE, especially during the first and last periods of the day. The estimated average daily price contributions are consistent with this result