The Effect of Debt Ceiling Announcements on the Banking Industry\u27s Stock Returns: An Event Study Approach

In the wake of the debt ceiling crisis in the summer of 2011, the effect of the United States’ massive and growing national debt on asset markets has become a greater concern. With the banking and finance industry now taking up an increasing share of the United States economy, it is important to understand how ongoing increases in the national debt affect the value of firms in this industry. In particular, negative market reactions to increases in the allowable debt (the debt ceiling) may reduce investor wealth and perhaps also the willingness of banks to facilitate flows of capital and investment. In this thesis, an event study methodology is used to examine how announcements of increases in the debt ceiling affect the stock returns of firms in the banking industry and whether these potential effects have changed over time from year 1984 to 2006. However, this study finds that, overall, debt ceiling announcements have had statistically insignificant effects on the stock returns of commercial banks and created minimal abnormal return in the firms’ stocks. Thus, these findings support the idea that from 1984 to 2006 the rising debt, as illustrated by the debt ceiling, insignificantly impacted the stock returns of the banking industry