Download Third World Debt Default Announcements and Market Learning :

Third World Debt Default Announcements
and Market Learning :
Effects of Sequential Debt Defaults on U.S.
Banks
Co-authored with George Philippatos
Managerial Finance, Volume 22 No. 7, 1996
Abstract
From 1982 to 1987 several Third World borrowers defaulted on
their loans to U.S. creditor banks. The defaults resulted in the
deterioration of the quality of loan assets held by the banks. The
purpose of this study is to analyze the market reaction to a series
of sovereign debt defaults. Specifically, we analyze eight events
during the six year period to find out how the market reaction
changed from one event to the next. Standard residual analysis
and volatility tests are employed to a sample of 75 banks
common to all eight events. The speed of adjustment to the
sequential events indicates that with each event, the market
becomes better informed and there is evidence of market
learning. New SEC regulations requiring banks to disclose
significant exposures to foreign borrowers and increasing
awareness about the quality of the loan portfolio of banks helped
in the market correctly evaluating the effects of defaults on the
lenders.