The Effect of State Pension Cut Legislation on Bank Values

52 Pages Posted: 22 Jul 2014

See all articles by Lee J. Cohen

Lee J. Cohen

University of Georgia - Department of Finance

Marcia Millon Cornett

Bentley University - Department of Finance

Hamid Mehran

Independent

Hassan Tehranian

Boston College - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2014

Abstract

This study provides an empirical analysis of the impact of Wisconsin and Ohio pension cut legislation on values of banks operating in Wisconsin and Ohio, banks operating in other states in which pension cut legislation was being considered as Wisconsin and Ohio went through its legislative process, and all publicly traded U.S. banks. We find that banks doing business in Wisconsin and Ohio experience positive (negative) stock price reactions to announcements that indicate an increased (a decreased) probability of pension cut legislation. The stock price reactions are positively related to the extent to which banks operate in Wisconsin and Ohio. Stock price reactions are rarely evident for banks in the other thirteen states that were considering pension cut legislation during the period of analysis. We also find municipal bond spreads tighten and bank credit supply increases with pension cut legislation. Overall, the findings suggest states’ budget cuts affect bank values and credit supply through their municipal bond holdings.

Keywords: financial institutions, municipal debt, public pensions

JEL Classification: G11, G21, H72, H75

Suggested Citation

Cohen, Lee J. and Cornett, Marcia Millon and Mehran, Hamid and Tehranian, Hassan, The Effect of State Pension Cut Legislation on Bank Values (June 1, 2014). FRB of New York Staff Report No. 679, Available at SSRN: https://ssrn.com/abstract=2461401 or http://dx.doi.org/10.2139/ssrn.2461401

Lee J. Cohen

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Marcia Millon Cornett

Bentley University - Department of Finance ( email )

175 Forest Street
Waltham, MA 02154
United States

Hassan Tehranian

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States
617-552-3944 (Phone)
617-552-0431 (Fax)

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