Working Paper: CEPR ID: DP15858
Authors: Matthew Baron; Luc Laeven; Julien Penasse; Yevhenii Usenko
Abstract: We investigate asset returns around banking crises in 44 advanced and emerging economies from 1960 to 2018. In contrast to the view that buying assets during banking crises is a profitable long-run strategy, we find returns of equity and other asset classes generally underperform after banking crises. While prices are depressed during crises and partially recover after acute stress ends, consistent with theories of fire sales and intermediary-based asset pricing, we argue that investors do not fully anticipate the consequences of debt overhang, which result in lower long-run dividends. Our results on bank stock underperformance suggest that government-funded bank recapitalizations can often lead to substantial taxpayer losses.
Keywords: investments; financial crises; returns; fire sales
JEL Codes: G11; G14; G15; G41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| government-funded bank recapitalizations (G28) | taxpayer losses (H81) |
| debt overhang (H63) | lower future dividends (G35) |
| debt-related issues (F34) | impact on corporate earnings (G39) |
| banking crises (G01) | long-run equity returns (G12) |
| acute phase of banking crises (F65) | long-run equity returns (G12) |