An analysis of Puerto Rico’s bank failures through an event study

Abstract

This study aims to analyze the effect of news events on the returns of Puerto Rican banks before the closing of three of them on the same day. The commercial banks in Puerto Rico and the financial sector occupied a  second position regarding their economic contribution to the Gross Domestic Product. The event study methodology as a statistical technique employed in the study is, first, to relate events in the progression of each bank's failure to abnormal performance of its stock price and then secondly, to examine any abnormal performance of the data corresponding to Puerto Rican commercial banks, including the three failed banks, at the closing. This study contributes to the academic finance literature on event study methodology to measure the effect of the closure of three banks in a Latin American country subject to its regulatory system and oversight from the United States bodies. The results suggest that the failures signaled an unexpected deterioration in the operating and regulatory environments by affecting the returns. The investor's response reflected by falling stock prices can be considered a normal reaction to an unfavorable signal rather than a contagion effect. These results are helpful for regulators in identifying and developing measures to safeguard financial stability.

This article was originally deposited in Zenodo as part of the ALBUS Conference open-access archive.
Citation:
Cortés-Pérez, E. (2024). An analysis of Puerto Rico’s bank failures through an event study. Proceedings of the 2024 Academy of Latin American Business and Sustainability Studies (ALBUS), Puebla, México. https://doi.org/10.5281/zenodo.13996140

This version has been included in the official ALBUS Proceedings with permission and remains unchanged in content.