The Impact of TARP's Capital Purchase Program on the Stock Market Valuation of Participating Banks

Abstract

We examine the impact of media coverage of the Capital Purchase Program (CPP) under the Troubled Assets Relief Program on the equity market valuation of participating bank holding companies (CPP banks). We document substantial negative coverage of the CPP and its participants over the five quarters following the program’s initiation. We find that the extent of negative media coverage about the CPP exerted substantial downward pressure on the stock returns of CPP banks, decreasing their valuation relative to bank holding companies not participating in the program. We show that our findings cannot be explained by differences in the banks’ financial viability at the CPP’s initiation, new information about their performance being released to the market after the CPP’s initiation or preceding stock returns causing the negative media coverage. Our findings highlight the importance of investor sentiment, as reflected by the tone of media coverage, in banks’ valuation during a period of high uncertainty in financial markets.