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

Author

Listed:
  • Marcia Millon Cornette
  • Hamid Mehran
  • Kevin Pan
  • Minh Phan
  • Chenyang Wei

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.

Suggested Citation

  • Marcia Millon Cornette & Hamid Mehran & Kevin Pan & Minh Phan & Chenyang Wei, 2014. "CDS and equity market reactions to stock issuances in the U.S. financial industry: evidence from the 2002-13 period," Staff Reports 697, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:697
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    References listed on IDEAS

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    More about this item

    Keywords

    financial crisis; credit default swaps; stock issuance; financial institutions;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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