Download This PaperDid Comprehensive Assessment (CA) 2014 and Stress Test Exercise (STE) 2016 resolve information asymmetry?
25 Pages Posted: 6 Apr 2021
Date Written: April 4, 2020
Abstract
The study investigates the informational value of the Comprehensive Assessment (CA) 2014 and the Stress Test Exercise (STE) 2016 by leveraging the literature on market reactions around scheduled announcements and by analyzing the trading patterns and volume-return co-movements around the announcements. We corroborate the theoretical implications from the literature and find a significant drop in trading for the whole sample before the CA 2014 results announcement illuminating the existence of information asymmetry. The significant rise in trading and volume-return correlations after the CA report indicates the resolution of the information asymmetry. The released information signaled the costs of the new regulatory regime by revealing the critical risk factors for the regulator. We find no characteristic trading patterns around the STE 2016 results announcement due to the specificity of the publication period, however observing only the price reactions, we uncover significant negative market reactions for the banks falling under the Single Supervisor Mechanism (SSM) umbrella suggesting the investors' awareness of the regulatory costs arising from the SSM. The study adds to the academic literature focused mainly on earning announcements by providing evidence for market reactions after regulatory announcements and delivers valuable implications for policymakers.
Keywords: Stress test; Banking; Supervision; Event study
JEL Classification: G14; G21; G28
Suggested Citation: Suggested Citation