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Bank rescues and bailout expectations: The erosion of market discipline during the financial crisis

Florian Hett and Alexander Schmidt

No 36, SAFE Working Paper Series from Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt

Abstract: We show that market discipline, defined as the extent to which firm specific risk characteristics are re ected 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 disappearing 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)
New Economics Papers: this item is included in nep-ban and nep-cba
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7) Track citations by RSS feed

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Journal Article: Bank rescues and bailout expectations: The erosion of market discipline during the financial crisis (2017) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:safewp:36

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