Information Contagion and Bank Herding

Viral Acharya and Tanju Yorulmazer

Journal of Money, Credit and Banking, 2008, vol. 40, issue 1, 215-231

Abstract: We show that the likelihood of information contagion induces profit-maximizing bank owners to herd with other banks. When bank loan returns have a common systematic factor, the cost of borrowing for a bank increases when there is adverse news on other banks since such news conveys adverse information about the common factor. The increase in a bank's cost of borrowing relative to the situation of good news about other banks is greater when bank loan returns have less commonality (in addition to the systematic risk factor). Hence, banks herd and undertake correlated investments so as to minimize the impact of such information contagion on the expected cost of borrowing. Competitive effects such as superior margins from lending in different industries mitigate herding incentives. Copyright 2008 The Ohio State University.

Date: 2008
References: Add references at CitEc
Citations: View citations in EconPapers (170)

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Information Contagion and Bank Herding (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:mcb:jmoncb:v:40:y:2008:i:1:p:215-231

Access Statistics for this article

Journal of Money, Credit and Banking is currently edited by Robert deYoung, Paul Evans, Pok-Sang Lam and Kenneth D. West

More articles in Journal of Money, Credit and Banking from Blackwell Publishing
Bibliographic data for series maintained by Wiley-Blackwell Digital Licensing () and Christopher F. Baum ().