THE BRAZILIAN DEFAULT ANNOUNCEMENT AND THE CONTAGION EFFECT HYPOTHESIS

In this paper we use stocl market data to test several hypotheses regarding possible investor reaction to the February 20, 1987 Brazilian default. Both the traditional event study approach and a generalized least squares regression, using Brazilian exposure as an explanatory variable for abnormal returns, are used. A sample of 46 bank holding companies, all listed on the New York or American srock exchanges, is divided into groups of no, low and high Brazilian exposure. We find that the initial stock market reaction to the default represents a rational investor response to new bank-specific information. However, the stock market reaction also reveals that not all relevant information was contained in the disclosure announcement. Further, we find some evidence of a contagion effect related to size. © 1991.