Sectoral and industrial performance during a stock market crisis

•The impact of the Lehman Brothers' (LBs) bankruptcy is analyzed.•The performance of sectors and financial industries is examined.•Sectors and financial industries suffered various effects during the LBs' bankruptcy.•The financial sector and the diversified financial industry were the most significantly affected.•The paper proposes short selling securities of the most significantly affected sector and industry.

This paper investigates the impact of the news announcement of the Lehman Brothers' (LBs) bankruptcy on the performance of the New York Stock Exchange (NYSE) sectors and financial industries. Based on descriptive index level results, Bartram and Bodnar (2009) conclude that the reaction of all sectors and industries was homogeneous during the LBs' bankruptcy and equity investors could not benefit from diversification. Motivated by Narayan and Sharma's (2011) findings on firm and sector heterogeneity, this paper employs an event study approach to further examine the sectoral and industrial performance during the bankruptcy period. Daily data for a total of 481 firms is examined. The main contribution of this paper is that it provides evidence that sectors behave heterogeneously during a stock market crisis and the significant adverse impact from the LBs' bankruptcy is discriminatory toward the financial sector and the diversified financial industry, which were most exposed to LBs. This paper proposes for investors to short sell those sector's or industry's securities that are anticipated to be the most significantly adversely affected from a particular negative news announcement.