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