Misconduct in the banking industry

: stock market reaction to settlement announcements

Abstract

This study investigates the impact of settlement announcements between international banks and regulators on the short-term stock market performance of the banks. Recurring to event study methodology, this analysis is focused in settlements larger than USD 100 million. The dataset is comprised of penalties imposed on 25 financial institutions indentified as Global Systemically Important Banks (G-SIBs), totaling 141 events from 2010 to February 2017. Results for the full sample show significant positive abnormal returns for different periods surrounding the event. Significant positive abnormal returns on the day before the announcement for non-USA banks suggest leakage of information before the information is made public. Regarding USA banks the market response, although positive, seems to be slightly delayed. The positive abnormal returns indicate that investors are pleased that litigation cases are concluded and that the terms of deals are better than expected. Partial tax deduction of financial penalties also contributes to the positive reaction. Analysis of the determinants of abnormal returns supports these arguments and reveals that investors penalize less efficient banks. Lastly, settlements involving payments with compensatory nature and violation of sanctions are particularly well received by the market and lead to larger abnormal returns.

Date of Award	5 Mar 2018
Original language	English
Awarding Institution	Universidade Católica Portuguesa
Supervisor	Geraldo Cerqueiro (Supervisor)