Abstract
Financial institutions have been subjected to several forms of regulatory intervention in recent years. Intervention may cause a wealth transfer to depository institutions and may therefore perceive these institutions to be undervalued. This effect can be verified by a positive abnormal share price response of the depository institutions. When the intervention is in response to a problem, the potential wealth transfer is a function of the magnitude of the problem, the magnitude of the remedy, and the financial source of the remedy (the source of the wealth transfer). One of the most prominent forms of intervention in the 1980s was the Debt Reduction Plan. Our study measures the effects of the Debt Reduction Plan on commercial bank share prices. We found that announcements pertaining to the Plan elicited a favorable share price response. Furthermore, the degree of response was positively associated with the bank's degree of exposure to debt of less developed countries.
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