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The Dilemma of International Diversification: Evidence from the European Sovereign Debt Crisis
Author(s) -
Francis Bill B.,
Hasan Iftekhar,
Kostova Gergana L.,
Ben Naceur Sami
Publication year - 2020
Publication title -
asia‐pacific journal of financial studies
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.375
H-Index - 15
eISSN - 2041-6156
pISSN - 2041-9945
DOI - 10.1111/ajfs.12293
Subject(s) - diversification (marketing strategy) , financial system , european debt crisis , business , credit rating , sovereignty , sovereign credit , external debt , debt , economics , credit risk , international trade , credit default swap , finance , european union , political science , european integration , marketing , politics , law
This paper tests how capital markets value the international diversification of banks in good and in bad economic times by investigating changes in domestic and foreign sovereign debt ratings before and during the European sovereign debt crisis. Tracing 320 European banks in 29 countries and 226 credit rating announcements for European sovereigns between 1 January 2001 and 15 August 2012, we show that the market values banks with access to foreign funds. Despite occasional adverse effects immediately following negative news regarding sovereign credit rating changes, international diversification was found to be beneficial to European banks, especially during periods of distress.