Pricing the net benefits of a public loan guarantee scheme in a developing market

Abstract

Turkish credit markets experienced a liquidity crunch following the Brexit referendum in June, the attempted coup in July, and the US election in November of 2016. The government announced a 12.5-fold increase in the Treasury support for the Credit Guarantee Fund to alleviate the credit squeeze. We investigate whether investor reactions to the announcement of the increase in Treasury support in KGF are in line with the stated aim of policymakers. Firms listed on Borsa İstanbul averaged 5.72 percent cumulative abnormal returns (CARs) in the 9-day window around the announcement. Investors anticipated the benefits from public guarantees would outweigh the costs. The positive and significant CARs suggest that the information released in the announcement, in line with the program aims, positively affected investor expectations.