CDS and equity market reactions to stock issuances in the U.S. financial industry: evidence from the 2002-13 period

Marcia Millon Cornette, Hamid Mehran, Kevin Pan, Minh Phan and Chenyang Wei

No 697, Staff Reports from Federal Reserve Bank of New York

Abstract: We study seasoned equity issuances by financial and nonfinancial companies between 2002 and 2013. To assess the risk and valuation implications of these issuances, we conduct an event-study analysis using daily credit default swap (CDS) and stock market pricing data. The major findings of the paper are that equity prices do not react to new issues in the pre-crisis period, but react negatively in the crisis. CDS prices respond 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 when the federal government injected equity into financial institutions to ensure their viability. The market reacted to this by assessing significantly lower costs for default protection via credit default swaps on equity issue announcements. The evidence indicates that single-name CDS based on financial firms? default probabilities are potentially useful for private investors and regulators.

Keywords: financial crisis; credit default swaps; stock issuance; financial institutions (search for similar items in EconPapers)
JEL-codes: G01 G21 G32 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2014-11-01
New Economics Papers: this item is included in nep-cfn and nep-fmk
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.newyorkfed.org/research/staff_reports/sr697.html Summary (text/html)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr697.pdf Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:697

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().