European Listed Companies’ Share Price Reactions to Global Credit Crunch: Typology of Winners and Losers

Abstract

The large variances in the share price reactions to the 2007 credit crunch appear to depend on the geographical region, size and financial performance of companies. In order to identify commonalities and idiosyncrasies in these influences, we perform cluster analysis of companies' share price performance and financial and structural data as of 31 December 2008 in comparison to the start of the credit crunch in July 2007 on a sample of 705 listed companies from 45 European countries. Employing k-means clustering, we recognise 8 distinct clusters, one of these comprising companies, which gained in stock prices under the credit crunch. Most of the winners tend to be large companies in the EU 15 old member states, showing a relatively low ex ante P/E ratio, high profit margin and moderate return on assets. However, companies having experienced biggest losses in share prices are the ones with highest ex ante P/E ratios and high return on assets, demonstrating a clear contrast between the overly optimistic expectations of shareholders and companies' actual ability to increase value prior to the credit crunch. Interestingly, belonging to a certain industry does not seem to have been a key driver of companies' stock price reactions to the credit crunch. It is evident that the credit crunch that got its start in 2007 in the United States attacked severely also European companies. The credit crunch in the USA became apparent when structured finance products based on mortgage loans turned out to be much riskier than would have been expected under declining real estate prices. This in turn caused a major decline in the ratings of several investment products, bringing along difficulties for companies in the finance and real estate sectors. The liquidity crisis and the consecutive credit crisis, accompanied by a crisis in trust, significantly affected stock prices. The aim of this paper is to map a typology of European listed companies' share price reactions to the credit crunch by means of cluster analysis based on the financial and other data of these companies. In particular, we attempt to get