Thrift conversions and windfall profits: An empirical examination

The thrift industry has been studied extensively in recent years due to the enormous costs to resolve failed thrifts during the late 1980s and early 1 990s. Almost all of the studies have focused on the causes of these failure s. Yet an important but relatively neglected development that merits furthe r study is the conversion of mutual institutions to the stock form of owner ship. Such conversions raise questions regarding the appropriate price for the shares in initial offerings, particularly in view of reports that windf all profits have been realized by the initial investors in numerous cases a nd who should receive the shares. The purpose of this article is to examine mutual thrifts that converted to stock ownership form during 1992 and 1993 to determine whether excess returns were indeed realized and, if so, to id entify the determinants of those excess returns. The empirical results indi cate the initial investors do indeed benefit from significantly positive ab normal returns during the first few days of trading after conversion. Addit ional empirical results indicate that both the pro-forma price-to-book rati o and the dollar amount of shares management intends to purchase are signif icant factors in explaining the variation in the abnormal returns.