The Effect of Bank Debt Downgrades on Stock Prices of Other Banks

Robert Schweitzer, Samuel H Szewczyk and Raj Varma

The Financial Review, 2001, vol. 36, issue 4, 139-55

Abstract: We find that debt downgrades of money center banks elicit negative stock price responses in nondowngraded money center banks. Stock prices of larger regional banks also react to these downgrades. Although downgrades of regional banks evoke negative stock price responses for regional banks in the same geographic region, the importance of geographic region as a factor determining the extent of intra-industry reactions has diminished since 1989. Our results indicate that the merger and expansion activities triggered by interstate banking have blurred differences between regional and money center banks as interstate banking activity has moved towards nationwide banking. Copyright 2001 by MIT Press.

Date: 2001
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