The impact of bailout on U.S. bank creditors' equity values: an event study of South Korea's case
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The role played by the IMF in international debt crises has long been controversial among both academians and policy makers. This dissertation is an event study of the impact of the International Monetary Fund (IMF) bailouts on international debt markets. The main hypothesis is that the IMF bailout announcements concerning South Korea in late November and early December 1997 significantly increased the implicit value of the international bank loans and investments to South Korea and hence, the equity values of its international bank creditors. More specifically, this dissertation tests whether the bailout produced positive abnormal returns for South Korea's international bank creditors' stockholders. If significant positive results occurred, then we can infer that the IMF bailouts are probably responsible for producing "extra" positive wealth for private stockholders. Also, special attention is given to the current role of the "too-big-to-fail" (TBTF) policy in the U.S. banking industry. The prevalent view is that the Federal Deposit Insurance Corporation Improvement Act (FDICIA) makes use of the TBTF policy more difficult than before 1991 (Benson and Kaufman, 1998). However, opposing views with regard to the existence of this implicit government guarantee still exist (Annual Report, 1997, Federal Reserve Bank of Minneapolis). It would be interesting to know, under a severe economic impact that could bring significant downside risk to large banks, whether market investors in different sized banks are indifferent or not to the effects of both negative and positive news. In addition, market informational efficiency and rational pricing behavior with regard to the IMF bailout of South Korea are studied. The empirical investigation examines the potential abnormal performance of a total of 230 U.S. banks, categorized into three groups according to foreign exposure levels, and two groups according to the TBTF protection, during mid-November to early December 1997, based on an estimation period from January 1996 to June 1997. The findings show that there was a statistically significant positive wealth transfer from the IMF to the international bank creditors during the major event announcements. The evidence also indicates that the TBTF banks tend to be more heavily exposed than the non-TBTF banks, and the abnormal performance of the non-TBTF banks exceeded that of the TBTF banks significantly, indicating the potential effectiveness of the implicit TBTF policy in the international debt markets. Further, the evidence shows the existence of the market informational efficiency and the different pricing behavior of different groups of banks.