Academic journal article Academy of Accounting and Financial Studies Journal

The Market Effect of the Troubled Asset Relief Program

Academic journal article Academy of Accounting and Financial Studies Journal

The Market Effect of the Troubled Asset Relief Program

Article excerpt

ABSTRACT

In October of 2008, the U.S. Treasury launched the Troubled Asset Relief Program (TARP). The purpose of the Program was to promote stability for financial institutions primarily in association with the subprime mortgage debacle. Upon its inception, some theorized that this program would be beneficial to stockholders of firms participating in the Program, while other believed that it would be detrimental to stockholders of recipients of such funds. Because of these conflicting opinions, this study was undertaken to assess the effect the Program has had in its brief life to stockholders. An analysis was conducted using a sample of 30 firms which participated in the Program. This analysis compared the security prices of these firms in the three years preceding TARP (pre-TARP) to the security prices of the same firms in the three years after TARP (post-TARP). Findings indicate that stockholders of these firms realized a drop in security prices between the two periods. In addition, a control sample of 30 similar firms that did not receive TARP funding was analyzed during the same periods. Findings indicate that these firms did not realize a drop in security prices between the two periods. Thus, we can conclude, for those firms participating in TARP, stockholders of those firms saw the value of their investment drop, whereas stockholders of non-participating firms did not see a similar drop.

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

TARP is a program of the United States government to purchase assets and equity from financial institutions to strengthen its financial sector. It is the largest component of the government's measures in 2008 to address the subprime mortgage crisis. The Program allows the Department of Treasury to purchase up to $700 billion of "troubled assets" defined as a) residential or commercial mortgages and any securities, obligations, or other instruments that are based on such mortgages; and b) any other financial instrument that the Secretary of the Treasury determines the purchase as necessary to promote financial market stability. The Program has undergone some criticism with the argument that these loans in essence lead to a hidden subsidy that would be split by asset managers, shareholders and creditors. In essence, some, such as Economist Paul Krugman (2009), have stated that those who hold stock in institutions receiving TARP monies would realize an unfair gain in security market prices. Others, such as banking analyst Meridith Whitney (2009), have argued that these banks would not sell bad assets at fair market values because they are reluctant to take asset write downs. Since TARP provides for retirement of loans at market value, the stock price at these distressed financial institutions would be hurt.

LITERATURE REVIEW

From an empirical research perspective, there exists growing extant literature on the TARP subject. Delgaard and Hansen (2004) posit that such government infusions have minimal effect on the economy in general since these programs do not affect "deep" structural changes. Taylor (2009) goes further and finds that TARP has prolonged the financial crisis with negative impact on corporate earnings. Veronesi and Zingales (2010) discover that employee bonuses at TARP recipients led to sharp negative excess returns, Bowman and Rugg (2010) find that the TARP bailout contributed to the decline in average family income by driving up additional federal taxes, Krishnan et al (2011) find that TARP recipients may have capitalization difficulties, Stunda (2011) finds that management forecasts of firms accepting TARP funds indicate more upward bias. Black and Hazelwood (2012) find that relative to non-TARP banks, the risk of loan originations increased at TARP banks but decreased at non-TARP banks. Wilson (2012) finds that institutions that accepted TARP funds also present problems in obtaining stock capitalization. Currently, no literature exists relative to TARP recipients and the effect the program has had on their security prices. …

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