Investing in Crises

91 Pages Posted: 8 Mar 2021 Last revised: 20 Jul 2021

See all articles by Matthew Baron

Matthew Baron

Cornell University - Samuel Curtis Johnson Graduate School of Management

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

Julien Pénasse

Universite du Luxembourg

Yevhenii Usenko

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 3 versions of this paper

Date Written: July 20, 2021

Abstract

We investigate asset returns around banking crises in 44 advanced and emerging economies from 1960 to 2016. In contrast to the view that buying assets during banking crises is a profitable long-run strategy, we find that returns of equity and other asset classes often underperform following banking crises. This underperformance is particularly pronounced for bank stocks. The collapse in equity prices during crises is followed by lower dividends rather than a bounce back in prices, suggesting that the collapse is primarily driven by real damage to earnings and balance sheets, rather than temporary investor leverage constraints or illiquidity. Long-run returns and dividends can be predicted at the time of the crisis with debt-overhang-related measures. Our findings suggest that, even during the acute phase of banking crises, equity investors do not fully recognize the extent of bad loans made by banks and the long-term real consequences of crises.

Keywords: banking crises, returns, investor expectations, fire sales, debt overhang

JEL Classification: G01, G11, G12, G15, G21

Suggested Citation

Baron, Matthew and Laeven, Luc A. and Pénasse, Julien and Usenko, Yevhenii, Investing in Crises (July 20, 2021). Available at SSRN: https://ssrn.com/abstract=3762043 or http://dx.doi.org/10.2139/ssrn.3762043

Matthew Baron (Contact Author)

Cornell University - Samuel Curtis Johnson Graduate School of Management ( email )

Ithaca, NY 14853
United States

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Julien Pénasse

Universite du Luxembourg ( email )

L-1511 Luxembourg
Luxembourg

Yevhenii Usenko

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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