Media Coverage and the Stock Market Valuation of TARP Participating Banks^‡

‡ This paper has been previously circulated with the title ‘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.

Acknowledgements

We appreciate the helpful comments received from an anonymous referee and the editor (Laurence van Lent). We also wish to thank Ray Ball, Phil Berger, Michelle Hanlon, Steve Kaplan, Anil Kashyap, Christian Leuz, Scott Richardson, Sugata Roychowdhury, Doug Skinner, Ewa Sletten, Ross Watts, Rodrigo Verdi, participants at the 47th Annual Conference on Bank Structure and Competition at the Chicago Fed and seminar participants at MIT and the University of Chicago Booth School of Business for their comments. We are very grateful to Vincent Pham for excellent research assistance. We thank RavenPack for providing the data on media tone.

Notes

‡ This paper has been previously circulated with the title ‘The Impact of TARP's Capital Purchase Program on the Stock Market Valuation of Participating Banks’.

¹The U.S. government provided an extensive rescue package beyond the CPP; this included debt guarantees, short-term funding through Federal Reserve Bank (FRB) facilities, the purchase of impaired assets and insurance against potential losses on specified portfolios of assets.

²For instance, Stephen Wilson, chairman of LCNB National Bank in Ohio, argued that the ‘the public perceives [participation in the CPP] as weakness’ and this is ‘so discouraging because nothing could be further from the truth’ (Satow, 2009). Douglas Elliott of the Brookings Institute reasoned that the TARP is ‘one of the most effective large-scale government programs that the public has vehemently decided was a bad idea’ (Smith, 2010).

³Using the content from a popular The Wall Street Journal column ‘Abreast of the Market’, Tetlock (2007) examines the effect of media pessimism on daily returns on the Dow Jones Industrial Average Index and finds that high media pessimism predicts downward pressure on market prices.

⁴In addition, it is challenging to convincingly disentangle between different media effects (Tetlock, 2007).

⁵We acknowledge that a potential limitation of our analyses is the possibility that the coverage of the CPP and participant banks in The Wall Street Journal is not representative of the coverage in other media outlets.

⁶The Treasury announced the establishment of another program, the Capital Assistance Program (CAP) in February 2009; its intent was to ensure that banks had a sufficient capital cushion to withstand larger than expected losses in the future. CAP included a stress test to evaluate capital buffers. If capital was needed and could not be raised from private markets, the banks would have been forced to accept CAP assistance in return for mandatory convertible preferred stock. On 9 November 2009, the Treasury closed this program without making any investments (SIGTARP 2010).

⁷See http://www.financialstability.gov/roadtostability/CPPfactsheet.htm.

⁸Another program under TARP, the Target Investment Program, set up after the CPP, appeared to be more of a bailout of unhealthy banks.

⁹Qualifying financial institutions include bank holding companies, savings associations and certain savings and loan holding companies. In this paper, we focus on bank holding companies.

¹⁰The capital infusion was initially provided to Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley, State Street and Wells Fargo. However, Merrill Lynch was acquired by Bank of America and its capital infusion was provided to Bank of America.

¹¹The application period for publicly held financial institutions closed on 14 November 2008; the application period for privately held institutions closed on 8 December 2008.

¹²Bank holding companies with total consolidated assets of less than $500 million file a Call Report called Parent Company Only Financial Statements for Small Bank Holding Companies – FR Y-9SP. The FR Y-9SP provides more limited data than FR Y-C, which prevents us from incorporating these companies into the analysis.

¹³We collected the announcement dates from Factiva. For banks that did not have a press release about their capital infusion approval, we define the announcement date as the day of the relevant TARP transaction report.

¹⁴We define this measure based on the $100,000 threshold for uninsured deposits, which was the FDIC's threshold on 30 September 2008. The FDIC increased the deposit threshold up to $250,000 in October 2008. Because call reports continue to provide uninsured deposits data based on the $100,000 threshold, we use this definition in all of our tests.

¹⁵CSS combines five sentiment scores (PEQ, BEE, BMQ, BCA and BAM), while insuring that there is no sentiment disagreement among these scores. The PEQ score represents the news sentiment of a given news item according to the PEQ classifier, which specializes in identifying positive and negative words and phrases in articles about firms with publicly traded equity. The BEE score represents the news sentiment of a given story according to the BEE classifier, which specializes in news stories about earnings evaluations. The BMQ score represents the news sentiment of a given story according to the BMQ classifier, which specializes in short commentary and editorials on global equity markets. The BCA score represents the news sentiment of a given news story according to the BCA classifier, which specializes in reports on corporate action announcements. The BAM score represents the news sentiment of a given story according to the BAM classifier, which specializes in news stories about mergers, acquisitions and takeovers. PEQ and BEE classifiers are dictionary-based measures, while BMQ, BCA and BAM classifiers are based on the Bayesian learning approach. It is important to clarify that in the above descriptions of the sentiment scores ‘specialize’ means that the score was originally developed and tested using different samples of media articles. For example, the BEE score was developed based on earnings-related articles and BMQ score was developed based on articles about global equity markets. All five sentiment scores are applied to a media article when evaluating its CSS score.

¹⁶While nine banks were ‘forced’ to accept capital infusions, Merrill Lynch was acquired by Bank of America and is therefore not included in our stock return analyses.

¹⁷In unreported robustness tests, we substitute NPL with a bank's book-to-market ratio and find similar results.

¹⁸We do not have data for the state-level characteristics for four banks that are headquartered in Puerto Rico. The decrease in the number of observations in column 2 relative to the 344 banks used in column 1 is due to the exclusion of these banks from the analyses.

¹⁹In unreported tests, we further analyze whether CPP participating banks engaged in earnings management to boost their profitability and improve their perceived healthiness. We look at discretionary loan loss provisions recorded by these banks during the period prior to CPP initiation and their change during the CPP participation period and find no evidence of earnings management.

²⁰To identify banks that announced that they are not taking part in the CPP or withdrew their applications, for each one of 158 banks in the control sample, we perform a detailed search on Factiva, LexisNexis, Google News and the RavenPack database to identify their disclosures with respect to the participation in the program. We select relevant disclosures by searching media articles, banks’ press releases and Securities and Exchange Commission filings using the following keywords: ‘Troubled Asset Relief Program’, ‘TARP’, ‘Capital Purchase Program’, ‘CPP’ or ‘Federal Aid’.

²¹Stress tests under the CAP were imposed on 19 institutions, but 4 of them are not included in our analysis.

²²The results are qualitatively similar when we analyze bank performance on a quarterly basis over the five quarters of our sample period. However, we note that the information on bank performance in the last quarter of 2008 is unlikely to affect the differential stock behavior of CPP and non-CPP banks because many CPP banks announced their participation close to the quarter's end.

²³In unreported tests, we examine the frequency of bank delistings, given that delistings are typically the result of poor economic performance (Shumway, 1997). Consistent with their superior performance, we find that between October 2008 and December 2009, CPP banks were much less likely to delist, particularly for negative performance reasons, compared to non-CPP banks. Bank delistings in 2009 explain the drop in the number of non-CPP banks in Panel C, compared to CPP banks, because we are measuring ROA and NPL at the end of 2009. Our delisting-related findings are consistent with Ng and Roychowdhury (2014), who show that banks that participate in the capital infusion program are less likely to fail (i.e. to be closed by bank regulators).

²⁴In cases where more than one article is published on the same day, we estimate the average sentiment of these articles to determine whether we classify the date as having negative or non-negative media sentiment.

²⁵A bank is classified as a CPP bank if the announcement of the bank's participation in the CPP is on or before the media article date.

Additional information

Funding

We gratefully acknowledge the financial support of the Singapore Management University, the London Business School RAMD Fund and the University of Chicago Booth School of Business.