The End of Market Discipline? Investor Expectations of Implicit Government Guarantees

Viral Acharya, Deniz Anginer and Joe Warburton

MPRA Paper from University Library of Munich, Germany

Abstract: Using unsecured bonds traded in the U.S. between 1990 and 2012, we find that bond credit spreads are sensitive to risk for most financial institutions, but not for the largest financial institutions. This “too big to fail” relation between firm size and the risk sensitivity of bond spreads is not seen in the non-financial sectors. The results are robust to using different measures of risk, controlling for bond liquidity, conducting an event study around shocks to investor expectations of government guarantees, examining explicitly and implicitly guaranteed bonds of the same firm, and using agency ratings of government support for financial institutions.

Keywords: Too big to fail; Dodd-Frank; bailout; implicit guarantee; moral hazard (search for similar items in EconPapers)
JEL-codes: G21 G24 G28 (search for similar items in EconPapers)
Date: 2016-05-01
New Economics Papers: this item is included in nep-ban and nep-cfn
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (83)

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