Intra-Industry Contagion Effects of Earnings Surprises in the Banking Sector

In this paper we investigate whether contagion is present in the banking sector by analyzing how banks are affected by negative earnings surprises from their competitors. The banking sector is of crucial importance for the economy and, thus, highly regulated on an individual bank level. However, a high degree of contagion risk should call for a regulation of the financial network rather than solely regulating on an individual level. To be able to make a judgement about the magnitude of possible contagion effects we compare the results of the banking sector with the results of the non-banking industries. We find that earnings surprises cause significant contagion in the banking sector. In contrast, we do not find this effect in the non-banking sectors, including the insurance sector. The magnitude of contagion in the banking sector is positively related with the size of the bank reporting an earnings surprise, as well as the size of the affected banks