Bank Bailouts and Market Discipline: How Bailout Expectations Changed During the Financial Crisis

Florian Hett () and Alexander Schmidt ()
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Florian Hett: Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany
Alexander Schmidt: Goethe University Frankfurt and GSEFM, Germany

No 1305, Working Papers from Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz

Abstract: We show that market discipline, defined as the extent to which frm specific risk characteristics are reflected in market prices, eroded during the recent financial crisis in 2008. We design a novel test of changes in market discipline based on the relation between firm specific risk characteristics and debt-to-equity hedge ratios. We find that market discipline already weakened after the rescue of Bear Stearns before disappear- ing almost entirely after the failure of Lehman Brothers. The effect is stronger for investment banks and large financial institutions, while there is no comparable effect for non-financial firms.

Keywords: Bailout; Implicit Guarantees; Too-Big-To-Fail; Market Discipline (search for similar items in EconPapers)
JEL-codes: G14 G21 G28 H81 (search for similar items in EconPapers)
Pages: 42 pages
Date: 2013-08-01, Revised 2013-08-01
New Economics Papers: this item is included in nep-ban, nep-cba and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:jgu:wpaper:1305

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