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Further Evidence on Equity Market Contagion: the FSLIC's Solvency and the Liquidity Crisis of Financial Corporation of America
Author(s) -
Cooperman Elizabeth S.,
Wolfe Glenn A.,
Verbrugge James A.,
Lee Winson B.
Publication year - 1998
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1998.tb01399.x
Subject(s) - solvency , equity (law) , corporation , market liquidity , financial crisis , financial system , loan , business , monetary economics , economics , portfolio , finance , financial economics , law , political science , macroeconomics
Whether pure contagion is more likely to occur when a federal deposit insurer is severely undercapitalized is an unanswered question. This paper provides evidence on this issue by examining the stock market reaction of savings and loans (S&Ls) to the crisis of Financial Corporation of America (FCA) in 1984, when the Federal Savings and Loan Insurance Corporation was fiscally unsound. Consistent with a contingent insurance guarantee hypothesis, the results show large, significant negative abnormal returns (ARs) for a portfolio of high insured deposit S&Ls during FCA's crisis.