Doctoral Dissertations

Date of Award

8-1991

Degree Type

Dissertation

Degree Name

Doctor of Philosophy

Major

Business Administration

Major Professor

George C. Philippatos

Abstract

The purpose of this dissertation is to test and compare the announcement and industry contagion effects of the Mexican and Brazilian foreign debt moratorium announcements of 1982 and 1987. In addition to measuring individual announcement and industry contagion effects, the learning that took place in the period between the two announcements is also analyzed by comparing the bank share price changes during the two events and analyzing several related events that occurred during the intervening period. Three sets of hypotheses are tested. The first set of hypotheses examines whether the default announcements by Mexico and Brazil conveyed any new information to the market or whether there was information leakage prior to the announcements. The second set of hypotheses tests for contagion effects in the market following the moratorium announcements. The third set of hypotheses tests for learning in the market from 1981 to 1987. The standard residual methodology is used to estimate abnormal returns. Intervention Analysis and chow-tests are conducted to confirm the results. Regression analysis is used to analyze various sub-events during the six-year period. A sample of ninety-four and eighty-seven banks are used for the Mexican and Brazilian events, respectively. This study finds that the Mexican debt moratorium announcement conveyed new information to the market. There was also a contagion effect where banks without any exposure to Mexico experienced downward adjustments in their security prices. Analysis of several events prior to the Mexican announcement indicated that there was some information leakage and bank equity price adjustments during these events. It also finds that the market did not react to the Brazilian moratorium announcement. However, the market did recognize and react to several of the events prior to the announcement. Finally, this study finds that the market response to debt default announcements changed over time. With each event, the magnitude of the market reaction became smaller. The market became increasingly aware of the deterioration in the quality of loan assets held by U.S. banks. The market did learn from the earlier events and modified its response to the latter events.

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