Financial firm bankruptcies, international stock markets, and investor sentiment

• Published date: 01 January 2019
• Author: Athanasios Sakkas,Zenon Taoushianis,Panayiotis Papakyriakou
• DOI: http://doi.org/10.1002/ijfe.1674
• Date: 01 January 2019

RESEARCH ARTICLE

Financial firm bankruptcies, international stock markets,

and investor sentiment

Panayiotis Papakyriakou

1

| Athanasios Sakkas

1

| Zenon Taoushianis

2

1

Department of Banking and Finance,

Southampton Business School, University

of Southampton, Southampton, UK

2

Department of Accounting and Finance,

School of Economics and Management,

University of Cyprus, Nicosia, Cyprus

Correspondence

Panayiotis Papakyriakou, Department of

Banking and Finance, Southampton

Business School, University of

Southampton, Southampton SO17 1BJ,

UK.

Email: p.papakyriakou@soton.ac.uk

JEL Classification: G14; G15; G33

Abstract

We consider bankruptcy announcements of large financial institutions in the

United States and examine their impact on an international sample of 66 stock

market indices. Employing an event‐study methodology, we find that stock

markets exhibit strong adverse reaction in the aftermath of such announce-

ments. Further, we develop a surprise measure, based on the country‐level

investor sentiment, and find that stock markets in negatively surprised coun-

tries respond quickly by sustaining significantly larger declines in the first

three trading days following the announcements. Finally, we examine the reac-

tion of stock markets, conditional on the economic classification of their home

countries, and find that stock markets in developing (developed) economies are

associated with substantially larger (smaller) economic losses.

KEYWORDS

bankruptcy announcements, economic classification, financial firms, international stock markets,

investor sentiment, surprise

1|INTRODUCTION

It is widely accepted that large financial firm bankrupt-

cies generate high uncertainty among investors and

affect the wider economy (Aharony & Swary, 1983).

The most pronounced recent example is the collapse of

the Lehman Brothers Investment Bank, 10 years ago.

With an aggregate value of assets exceeding 600 billion

USD at the time of the announcement, the Lehman

Brothers bankruptcy was the largest in history and is

associated with the onset of the global financial crisis

in 2008. That set aside, there are also other adverse

effects related to financial firm bankruptcies such as con-

tagion effects in the stock prices of competitors (Aharony

& Swary, 1996; Gay, Timme, & Yung, 1991; Helwege &

Zhang, 2016; Yamori, 1999) and the stock prices of firms

with exposure in the failing financial institutions

(Chakrabarty & Zhang, 2012; Fernando, May, &

Meggison, 2012). Overall, there is evidence to support

the view that stock prices of corporations related to

financial firms filing for bankruptcy decline following

the announcement.

This paper explores an area of research that, to the

best of our knowledge, is novel. In particular, we look

to identify an “international”contagion effect, following

bankruptcy announcements of large financial institutions

in the United States. There are several reasons to expect a

negative reaction of the international stock markets after

such announcements. First, the United States is one of

the strongest, most resilient, and probably the most influ-

ential country in the world and thus plays an important

role in affecting global stock markets (Bathia, Bredin, &

Nitzsche, 2016). Second, bankruptcies and particularly

those where the involved entity is a large financial insti-

tution are events that can increase the systemic risk in

the entire economy of a nation, group of countries, and

the world. Hence, large shocks stemming from strong

economies (such as the United States) are a signal of an

upcoming negative economic outlook. When this hap-

pens, investors engage in risk management (i.e., sell

Received: 29 March 2018 Revised: 2 September 2018 Accepted: 9 September 2018

DOI: 10.1002/ijfe.1674

Int J Fin Econ. 2019;24:461–473. © 2018 John Wiley & Sons, Ltd.wileyonlinelibrary.com/journal/ijfe 461