The LIBOR Scandal: a Comparison of Banks Involved Concerning the Impact of Disclosure and the Imposition of Fines on Stock Prices

von Maximilian Strotkamp

Prof. Dr. Horst Entorf

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Among other factors, the functioning of today’s global financial system strongly depends on trust (Tonkiss, 2009, p. 196). Over the recent years a number of scandals has repeatedly challenged this trust of consumers in banks and other financial institutions. A prominent representative of these scandals during and in the aftermath of the financial crisis involving the London Interbank Offered Rate (Libor) will be examined on the following pages in part I of this thesis. At the heart of part II will then be the question, whether banks or rather shareholders are negatively affected by fines imposed by regulatory authorities.

In part I the thesis therefore first gives a detailed overview of what the Libor actually is. This serves as a foundation to understand how and why it was manipulated. It will concentrate on the misconduct and the financial penalties of individual banks that have been fined as of May 2018. Therefore, the matter of Barclays plc, the first bank to settle the claim, will be discussed in greater detail before following the timeline of events until with Citigroup Inc. the last bank was fined in 2016. Being familiar with the misconduct and the fines of the banks it will be shortly examined on what dates the market was informed about the ongoing investigations into the banks that received a financial penalty later on. For this a research based on the daily press will reveal when this information went public.

In thesecond part of the paper, as a component of an event study, several statistical as well as economic models to estimate returns in the absence of the event of interest will be introduced. The procedure aims at calculating the abnormal return (AR), which is the stock price movement attributable to the event of interest only. In advance two points in time have been thought of providing abnormal returns in the context of the scandal. First, following the semistrong-form oft he efficient market hypothesis, the study will focus on a twoday period when the market was informed about investigations against single companies. The second point in time will be a two-day period, when the banks were finally fined.

Due to thelimited results from this, a promising third point in time will be identified and analyzed. Next, the AR is set in context of the market capitalization of the banks. As this sheds new light on the previous results, some additional reasoning is provided to explain the findings.