The International Debt Crisis, Investor Contagion, and Bank Security Returns in 1987: The Brazilian Experience

We use event-study methods to examine security returns for the 25 largest U.S. bank holding companies surrounding two events: (1) Citicorp's $3 billion loan-loss-reserve decision of May 19, 1987 and (2) subsequent follow-the-leader behavior by other major banking companies. Although the market anticipated rational follow-the-leader behavior and rewarded it, the events were only partially anticipated. We interpret the loan-loss-reserve decisions as foreshadowing the write-down of LDC loans. Such bookkeeping entries affect market prices because they signal economic value-enhancing corporate and strategic restructurings. (Printed by permission of the publisher.)