The June 1989 Regulatory Mandated Argentinean Loan Write-offs and US Bank Security Returns: An Empirical Investigation

This study examines the stock market reactions to an involuntary adjustment to loan-loss reserves by the write-downs of Argentinean loans by major banks with Argentinean loan exposure. This event has escaped investigation in the empirical literature of the LDC debt crisis. A seemingly unrelated regression study, rather than a Brown and Warner (1980) event study, is employed to investigate two pairs of hypotheses, namely the new-information vs. information-leakage hypothesis and the rational-pricing vs. investor-contagion hypothesis, using daily stock market data. Sample banks are grouped into three portfolios (highly exposed multinational banks, mildly exposed regional wholesale banks and unexposed or nominally exposed regional consumer banks) to test the investor-contagion effect. The results indicate that the stock market adjusts quickly to new information, thereby providing evidence of semi-strong-form market efficiency. Unlike previous research, this research finds strong evidence for an investor-contagion effect.