The impact of government intervention on stock prices: A study of signaling effects of bailout on U.S. banks during the financial crisis in 2008

Abstract: The year of 2008 witnessed the largest number of government bailouts in the U.S. financial history. In this thesis, we investigate the short-term impact of government intervention on stock price performance for three samples of banking organizations in the U.S., grouped according to size. Two events, the bailout of Bear Stearns on March 14 and the TARP announcement of the Capital Purchase Program on October 14, will be studied to distinguish the difference in signaling effects between a specific bailout, targeting one bank and a general bailout, targeting the financial sector as a whole. The event study results demonstrate a too big to fail (TBTF) effect under a seven day event window, with large cumulative abnormal returns accruing to banks of large size. This is most evident for the general bailout announcement of TARP, in terms of cumulative abnormal returns and level of significance. Additionally, regressions on size, bank type, loan-to-deposits, goodwill-to-assets and return on average assets are run to account for other possible sources of excess return. The coefficients indicate an overall positive relationship between a bank's risk level and cumulative abnormal returns.