The Lehman Brothers' Bankruptcy: A Test of Market Efficiency
Allied Academies International Conference
page 43
THE LEHMAN BROTHER’S BANKRUPTCY: A TEST OF MARKET EFFICIENCY
Christine Pichardo, Longwood University Frank Bacon, Longwood University
ABSTRACT This study tests the market efficiency theory by examining the effect of the Lehman Brothers bankruptcy on several brokerage firms, as well as the overall market. It would suggest that these brokerage firms would occur negative stock prices following the announcement of the Lehman Bankruptcy. For this study, I analyzed 15 firms’ stock price’s risk adjusted rate of return before and after September 15, 2008, some with larger assets in Lehman than others. Results show stock prices dropping approximately 24 days prior to the announcement and continuing to drop for several weeks. This supports the semi-strong market theory; which suggest that the market anticipated the collapse of Lehman. INTRODUCTION When Lehman Brothers collapsed, they had about $60 billion in toxic bad debts, and had assets of $639 billion against debts of $613 billion; making it the largest investment bank to collapse since the 1990’s. With a bankruptcy of this capacity, you would expect the stock market to take some sort of hit. This study examines the market’s reaction to this event by analyzing the risk adjusted return of selected brokerage firms’ stock prices around the event date of September 15, 2008. LITERATURE REVIEW The concern for Lehman Brothers started as early as March, with the collapse of Bear Sterns. The recent collapse of large investment banks are the result of the sub prime mortgage crisis, which actually started about a year ago. That’s when the first signs that the soaring U.S. housing market was weakening. Interest rates began to increase, the economy weakened, which turned indebted homeowners into financial turmoil sparking foreclosures and rapid drops in house prices. Lehman Brothers were considered one of Wall Street’s biggest dealers in fixed-interest trading and were heavily
page 43
THE LEHMAN BROTHER’S BANKRUPTCY: A TEST OF MARKET EFFICIENCY
Christine Pichardo, Longwood University Frank Bacon, Longwood University
ABSTRACT This study tests the market efficiency theory by examining the effect of the Lehman Brothers bankruptcy on several brokerage firms, as well as the overall market. It would suggest that these brokerage firms would occur negative stock prices following the announcement of the Lehman Bankruptcy. For this study, I analyzed 15 firms’ stock price’s risk adjusted rate of return before and after September 15, 2008, some with larger assets in Lehman than others. Results show stock prices dropping approximately 24 days prior to the announcement and continuing to drop for several weeks. This supports the semi-strong market theory; which suggest that the market anticipated the collapse of Lehman. INTRODUCTION When Lehman Brothers collapsed, they had about $60 billion in toxic bad debts, and had assets of $639 billion against debts of $613 billion; making it the largest investment bank to collapse since the 1990’s. With a bankruptcy of this capacity, you would expect the stock market to take some sort of hit. This study examines the market’s reaction to this event by analyzing the risk adjusted return of selected brokerage firms’ stock prices around the event date of September 15, 2008. LITERATURE REVIEW The concern for Lehman Brothers started as early as March, with the collapse of Bear Sterns. The recent collapse of large investment banks are the result of the sub prime mortgage crisis, which actually started about a year ago. That’s when the first signs that the soaring U.S. housing market was weakening. Interest rates began to increase, the economy weakened, which turned indebted homeowners into financial turmoil sparking foreclosures and rapid drops in house prices. Lehman Brothers were considered one of Wall Street’s biggest dealers in fixed-interest trading and were heavily
References: Dolan, Karen. “Lehman, AIG, Merrill: Which Funds Are Most Affected?” Morningstar, inc. 15. September 2008. 17 October 2008. http://news.morningstar.com/articlenet/article.aspx?id=253125#hide Fama, E. F. (1970). “Efficient Capital Markets: A Review of Theory and Empirical Work.” Journal of Finance, Volume 25 (May), 383-417. http://stuwww.uvt.nl/fat/files/library/Fama,%20Eugene%20F.%20%20Efficient%20Capital%20Markets,%20A%20Review%20of%20Theory%20and%20Empirical%20Wor k%20(1970).pdf Graeme Wearden, David Teather, and Jill Treanor. “Banking crisis: Lehman Brothers files for bankruptcy protection.” Guardian.co.uk. 15 September 2008. 5 December 2008. http://www.guardian.co.uk/business/2008/sep/15/lehmanbrothers.creditcrunch Henderson, Marshall D. and Bacon, Frank. “Stock Market Efficiency and the 9/11 Terrorist Attack.” Proceedings of the Academy of Accounting and Financial Studies, Volume 14, Number 1 New Orleans, 2009 page 48 http://www.finance.yahoo.com http://www.investopedia.com Madura, Jeff. Financial Markets and Institutions.8th Edition. 2008 Allied Academies International Conference Maich, Steve. “Edge of Disaster: Fall of Lehman Brothers and Merrill Lynch”. Macleans. 2008. 5 December 2008. http://vnweb.hwwilsonweb.com.proxy.longwood.edu/hww/results/getResults.jhtml?_DARGS=/hww/results /results_common.jhtml.20#record_2 Ross, Westerfield, and Jaffe. Corporate Finance. 8th Edition. 2008 New Orleans, 2009 Proceedings of the Academy of Accounting and Financial Studies, Volume 14, Number 1