How do financial distress events affect bank returns and what is the role of capital related or bank specific variables in this context?

Abstract

This thesis analysis the impact of financial distressed banks on the stock return of the banking sector using event study methodology (ESM). In our thesis we are only going to consider financial distressed banks which either write down their Additional Tier 1 (AT1) bonds or convert their AT1 bonds into equity. The write down or conversion of AT1’s happen to be terms of the acquisition of the financial distressed bank in most of our selected events. Because we want to estimate the abnormal returns (ARs) for various securities over time, we are going to use the cumulative average abnormal return (CAAR) approach. Furthermore, we are going to use regression analysis to investigate the relationship between the previously calculated cumulative abnormal return (CAR) of banks as dependent variable, our control variables and our variables of interest. The event study results present that the selected events have statistically significant negative impacts on banking sectors stock returns. The regression results show us that our variables of interest including the presence of AT1 bonds in banks assets and Tier 2 ratio do not have statistically significant impacts on the dependent variable, whereas the capital adequacy ratio is statistically significant. Our bank-specific control variables size and profit show statistically significant impacts on the CAR of banks, whereas the variables capital and efficiency have statistically insignificant impacts. Our event study results and our regression results are overall robust.

Date of Award	17 Oct 2023
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Eva Schliephake (Supervisor)