Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/120845
Authors: 
Cornett, Marcia Millon
Mehran, Hamid
Pan, Kevin
Phan, Minh
Wei, Chenyang
Year of Publication: 
2014
Series/Report no.: 
Staff Report, Federal Reserve Bank of New York 697
Abstract: 
We study market reactions to seasoned equity issuances that were announced by financial companies between 2002 and 2013. To assess the risk and valuation implications of these seasoned equity issuances, we conduct an event analysis using daily credit default swap (CDS) and stock market pricing data. The major findings of the paper are that CDS prices respond quickly 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. At that time, the federal government injected equity into financial institutions to ensure their viability. The market reacted to the equity issue announcements by assessing significantly lower costs for default protection via credit default swaps. The evidence indicates that single-name CDS based on financial firms' default probabilities are potentially useful for private investors and regulators.
Subjects: 
financial institutions
stock issuance
credit default swaps
financial crisis
JEL: 
G01
G21
G32
Document Type: 
Working Paper

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