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Market Reaction to Increased Loan Loss Reserves at Money-center Banks by Jeff Madura; Wm. R. McDaniel is a Economics, Econometrics and Finance article available to read on EtoBox.

What is Market Reaction to Increased Loan Loss Reserves at Money-center Banks about?

On May 19, 1987, Citicorp announced (after markets closed) that it would add $3 billion to its loan loss reserve in recognition of the poor quality of outstanding loans to Third World countries. Eleven other money-center banks followed this policy over the next five months. The reported reactions of politicians, economists, and market analysts to the increased loan loss reserves varied from despair to praise. Nevertheless, the important issue is the investor's reaction as evidenced by changes in the market prices of the banks' stock. This article uses an event study methodology to shed some light on the issue. The first section of this article discusses possible reactions to Citicorp's announcements of increased loan loss reserves. The second section describes the formulation and results of the event study methodology as applied to stock prices of money-center banks that adjusted their loan loss reserves. Thc third section draws implications based on the empirical analysis, including some plausible signalling and agency interpretations. ## 1. Possible reactions to the announcement A number of analysts, quoted in the popular financial press, 1 believed that a negative market reactio

Who reads Market Reaction to Increased Loan Loss Reserves at Money-center Banks?

Author

Jeff Madura; Wm. R. McDaniel

Publisher

Springer; Springer-Verlag; Kluwer Academic Publishers; Springer Science and Business Media LLC (ISSN 0920-8550)

Published

1989

Language

EN

Field

Economics, Econometrics and Finance (Social Sciences)