The Impact of Government Intervention in Banks on Corporate Borrowers’ Stock Returns

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Abstract
Moving into and out of a financial and banking crisis is likely to be associated with spillover effects from the banking sector to the corporate sector. We investigate whether and how government interventions in the U.S. banking sector influence the stock market performance of corporate borrowers during the financial crisis of 2007-2009. We measure firms’ exposures to government interventions with an intervention score that is based on combined information on the firms’ structure of bank relationships and their banks’ participation in government capital support programs. We find that government capital infusions in banks have a significantly positive impact on borrowing firms’ stock returns. The effect is more pronounced for riskier and bank-dependent firms and those that borrow from banks that are less capitalized and smaller. Our study highlights positive effects from government interventions during the crisis, documenting that an alleviation of financial shocks to banks has led to significantly positive valuation effects in the corporate sector.

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