Three essays on the regulatory response to the financial crisis
The financial crisis of 2007-2011 resulted in unprecedented regulatory response. This dissertation analyzes three issues: the 2008 short sale ban; spillover effects of the ban to the Exchange Traded Fund (ETF) market; and Troubled Asset Relief Program (TARP) transactions. Results indicate: (1) Trading restrictions stabilized falling prices for most (75%), but not all securities. (2) Price stabilization due solely to TARP is ruled out. (3) Further evidence on the relationship between institutional ownership and short sale constraints. Firms with low institutional ownership, low short interest, small market cap, and NASDAQ firms were least affected by the ban. (4) Sharp declines (-40%) in short interest contributed to less informative prices. (5) Impediments to circumventing the short sale ban with ETFs occurred due to lower trading volume and short interest, wider bid-ask spreads, positive abnormal returns for financial sector ETFs, and negative abnormal returns for non-financial sector ETFs. (6) Financial sector ETFs traded as if they were subject to the same restrictions as individual securities. (7) ETFs and individual securities have a stronger complementary relationship than previously thought. (8) Negative returns upon TARP investment and positive returns upon TARP repayment are consistent with issuing/repurchasing equity. (9) Average cumulative return for TARP firms was 1.1% while non-TARP firms returned 69.2%. (10) Annualized return to the U.S. Treasury was approximately 1.89% over a 4 year period ending December 31st, 2012. (11) No evidence of favorable insider activity around TARP investment and some evidence of favorable activity around TARP repayment.