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The failure of Lehman Brothers and its impact on other financial institutions

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  • Mark Anthony Johnson
  • Abdullah Mamun

Abstract

The failure of Lehman Brothers in 2008 was the largest bankruptcy in US history. Financial markets did not respond well to the news of this bankruptcy filing as the Dow Jones Industrial Average (DJIA) declined by more than 500 points by the end of the trading session that day. We identify key dates surrounding the final months of Lehman Brothers’ existence and study the wealth effects experienced by shareholders of other financial institutions’ stocks. At one of the first signs of trouble for the 158 year old investment bank, we find that when Lehman Brothers announced their first quarterly loss, the stocks of depository institutions and primary dealers declined. Ultimately, on 15 September 2008 when Lehman Brothers filed for bankruptcy, the stocks of banks and primary dealers declined by −2.90% and −6.00%, respectively, and were the biggest losers that day. We also study how the size of the depository institutions may have played a role in the adverse effects they experienced surrounding Lehman's troubles. We present evidence that it was primarily large banks, savings and loans and brokerage firms who were impacted the most.

Suggested Citation

  • Mark Anthony Johnson & Abdullah Mamun, 2012. "The failure of Lehman Brothers and its impact on other financial institutions," Applied Financial Economics, Taylor & Francis Journals, vol. 22(5), pages 375-385, March.
    • Handle: RePEc:taf:apfiec:v:22:y:2012:i:5:p:375-385
    DOI: 10.1080/09603107.2011.613762
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    References listed on IDEAS

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    1. C. H. Furfine, 2001. "The costs and benefits of moral suasion: Evidence from the rescue of long-term capital management," BIS Working Papers 103, Bank for International Settlements.
    2. Elijah Brewer & Julapa Jagtiani, 2007. "How much would banks be willing to pay to become \"too-big-to-fail\" and to capture other benefits?," Research Working Paper RWP 07-05, Federal Reserve Bank of Kansas City.
    3. Craig H. Furfine, 2001. "The costs and benefits of moral suasion: evidence from the rescue of long-term capital management," Proceedings 725, Federal Reserve Bank of Chicago.
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    Cited by:

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    2. Adonis Antoniades, 2015. "Commercial bank failures during The Great Recession: the real (estate) story," BIS Working Papers 530, Bank for International Settlements.
    3. Purcel, Alexandra-Anca & Dragos, Cristian Mihai & Mare, Codruța & Dragos, Simona Laura, 2023. "Voluntary health insurance and out-of-pocket payments in European OECD countries," Economic Modelling, Elsevier, vol. 120(C).
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    5. Didier Wernli & Lucas Böttcher & Flore Vanackere & Yuliya Kaspiarovich & Maria Masood & Nicolas Levrat, 2023. "Understanding and governing global systemic crises in the 21st century: A complexity perspective," Global Policy, London School of Economics and Political Science, vol. 14(2), pages 207-228, May.
    6. Harjoto, Maretno Agus & Rossi, Fabrizio & Lee, Robert & Sergi, Bruno S., 2021. "How do equity markets react to COVID-19? Evidence from emerging and developed countries," Journal of Economics and Business, Elsevier, vol. 115(C).
    7. Kristi Marinova, 2018. "Bank Insolvency – Regulatory Challenges And Empirical Evidence," Economic Archive, D. A. Tsenov Academy of Economics, Svishtov, Bulgaria, issue 2 Year 20, pages 58-67.
    8. Piotr Łasak & Sławomir Wyciślak, 2022. "Dynamics in Complex Systems Amidst Crisis 2008+: Financial Regulatory and Supervisory Reflections," Risks, MDPI, vol. 10(2), pages 1-15, February.
    9. Xin Yang & Shan Chen & Hong Liu & Xiaoguang Yang & Chuangxia Huang, 2023. "Jump volatility spillover network based measurement of systemic importance of Chinese financial institutions," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 28(2), pages 1201-1213, April.

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