Effects of Bailout Legislation: Implications from the Stock Market for Thrift Shareholders Available to Purchase

The examination of the differential effects of bailout legislation on well‐capitalized versus under‐capitalized thrifts is the focus of this study. The study examines return responses for portfolios of thrift stocks, formed on the basis of capitalization, to news events concerning bailout funding leading up to and concluding with the President's signing of the Competitive Equality Banking Act of 1987 (CEBA). The results indicate thrifts react differently to legislative news events based on their capitalization levels. This is evidenced by 1) the presence of abnormal returns for portfolios of relatively well‐capitalized and relatively under‐capitalized thrifts, 2) the trends in the size of abnormal returns across well‐capitalized (under‐capitalized) portfolios as the average level of capitalization decreases (increases), and 3) the opposite signs of abnormal returns for relatively well‐capitalized versus relatively under‐capitalized portfolios.