Market Reaction to the Issuance of Capital Instruments by Brazilian Banks

Abstract

Banks are allowed to employ debt instruments in order to meet the minimum requirements of capital, as long as they comply with the subordination agreements as determined by the Basel Accords. This paper takes account of the effective powers of these instruments, viewed from the standpoint of the investors, and seeks to assess their impact on the return on investments in the shares of the issuing banks within Brazil's capital markets. The article is, to a large extent, based on the research findings of Ammann et al (2017). The results of the empirical tests -which were conducted by means of event studies that involved issuing 30 instruments during the period 12/2008 -09/2017 -suggest that the issuances or announcements of these instruments had an adverse effect on the stock market value of the issuing banks. In addition, evidence was obtained that the market is unable to forecast the effects of these instruments before they take place. This paper seeks to contribute to the current literature on prudential regulations for banking and it hopes to assist banks in making decisions about capitalization.

Deferred tax assets, earnings quality and their effects on bank results: Evidence from Brazil

“…Pereira and Tavares (2021) stated that there are several factors that support and show that DTA can demonstrate information about the quality of earnings and, in their studies, they showed that, for company-years with large differences in DTA, it is less persistent in future profits than for firm-years with small DTA differences. Zanon and Dantas (2020) showed in their studies that companies with a high volume (low volume) of DTA stock have a large Contextus -Contemporary Journal of Economics and Management (2024), 22, e91530 | (small) effect on earnings persistence and can be used as a proxy for earnings quality.…”

“…DTA become the most common means of smoothing bank profits after the launch of Accounting Pronouncement Committee No. 32 (CPC 32), as it requires companies to evaluate at fair values, both assets and total liabilities in the Balance Sheet (Zanon & Dantas, 2020). Beatty and Liao (2014) used the DTA model to measure banks' earnings smoothing.…”

“…The current period's unexpected earnings are informative for analysts in that they cause a forecast revision, which can make earnings with higher quality and the best outcome for the ERC, and the degree to which the ERC captures the decision utility is sensitive to the degree of heterogeneity in the correlation between unexpected earnings and forecast revisions within the sample (Zanon & Dantas, 2020), with the dispersion of the analyst forecast as a measure of inherent uncertainty associated with company operations (Imhoff & Lobo, 1992). Thus, more uncertain operations are associated with a lower quality of profits (Jin, Kanagaretnam & Lobo, 2018).…”

“…From the perspective of using DTA to capture unexpected profits, Zanon and Dantas (2020) suggest that, to measure unexpected profits in the financial market, the assessment of the ERC must be considered and the investor will appreciate the information more and produce higher ERC , meaning that, the bank produces high-quality earnings but, if the investor assumes that the profit contains less information, he will not appreciate the information and will produce lower ERC, which means that the bank produces low-quality earnings (Batten & Vo, 2019). Therefore, the following hypothesis was tested: H3: The larger (smaller) the DTA, the larger (smaller) the ERC will be.…”

“…On the one hand, DTA directly impact bank results, polluting the quality of profits published in their financial statements, without economic materiality and, rather, the discretionary use of the laws that govern these assets (Kotsupatriy, Ksonzhyk, Skrypnyk, Shepel, & Koval, 2020). On the other hand, doubts are generated from the control of the use of DTA to meet a persistence of future profits, or the smoothing of profits, to maintain reported profits at the same level, generating specific benefits in the short term and, also, to capture unexpected profits from the financial market, as the results presented do not originate from financial intermediations, further compromising the principle of reliability of reported results (Faria & Amaral, 2015, Zanon & Dantas, 2020, Ferreira, 2021.…”