Financial firm bankruptcies, international stock markets, and investor sentiment

Abstract

We consider bankruptcy announcements of large financial institutions in the United States and examine their impact on an international sample of 66 stock market indices. Employing an event-study methodology, we find that stock markets exhibit strong adverse reaction in the aftermath of such announcements. Further, we develop a surprise measure, based on the country-level investor sentiment, and find that stock markets in negatively surprised countries respond quickly by sustaining significantly larger declines in the first three trading days following the announcements. Finally, we examine the reaction of stock markets, conditional on the economic classification of their home countries, and find that stock markets in developing (developed) economies are associated with substantially larger (smaller) economic losses.