The reaction of bank stock prices to news of derivatives losses by corporate clients Joseph F. Sinkey, Jr. a, * , David A. Carter b a Department of Banking and Finance, Terry College of Business, The University of Georgia, Athens, GA 30602-6253, USA b Department of Finance, College of Business Administration, Oklahoma State University, Stillwater, OK 74078, USA Received 22 October 1996; accepted 23 December 1998 Abstract From March through May of 1994, several large non®nancial ®rms announced millions of dollars in losses from derivatives deals, especially those arranged by Bankers Trust. Accompanying these announcements and related news stories were allegations that Bankers Trust had either misrepresented, lied, or deceived its clients. Using SUR methods, we investigate how these announcements aected Bankers Trust and three portfolios of banks: dealers, nondealers, and nonusers. Our results indicate signi®cant cumulative abnormal returns of 12.14% (Bankers Trust), 5.56% (13 dealer banks), and 2.45% (32 nondealer, user banks). The evidence suggests an intra-industry, in- formation-transfer eect consistent with rational pricing. The replacement cost of de- rivative contracts is an important factor in explaining the variation in abnormal returns across banks. Ó 1999 Elsevier Science B.V. All rights reserved. JEL classi®cation: G21; G14; G38 Keywords: Derivatives; Commercial banking; Event studies; Corporate clients Journal of Banking & Finance 23 (1999) 1725±1743 www.elsevier.com/locate/econbase * Corresponding author. Tel.: +1-706-542-3649; fax: +1-706-542-9434. E-mail address: jsinkey@cba.uga.edu (J.F. Sinkey, Jr.) 0378-4266/99/$ - see front matter Ó 1999 Elsevier Science B.V. All rights reserved. PII: S 0 3 7 8 - 4 2 6 6 ( 9 9 ) 0 0 0 1 6 - 3