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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/27409
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| Title: | Do Markets React to Bank Examination Ratings? Evidence of Indirect
Disclosure of Management Quality Through BHCs' Applications to Convert
to FHCs |
| Authors: | Allen, Linda
Jagtiani, Julapa
Moser, James |
| Issue Date: | Oct-2000 |
| Series/Report no.: | FIN-00-030 |
| Abstract: | Certain nonrecurring circumstances associated with the passage of the
Financial Services Modernization Act of 1999 have created a unique
opportunity for the market to obtain bank examination ratings of
management quality. We utilize this natural experiment in order to
determine how the market views this heretofore private information. We
find that the stock market utilizes bank examination ratings in order to
reveal regulatory intent, rather than simply as information about
management quality. Revelation of unsatisfactory M ratings (denoted
“bad news”) causes BHC stock returns and market risk betas
to increase, whereas revelation of acceptable M ratings (“good
news”) causes BHC stock returns and market risk betas to decrease.
The market thrives on “bad news” because unsatisfactory M
ratings indicate that regulatory intervention is likely to occur,
possibly benefiting both shareholders and creditors. On the other hand,
revelation of acceptable M ratings (“good news”) indicates
that bank regulators are unprepared to intervene in the near future.
Moreover, we find lower bond spreads for a subsample of FHCs with
satisfactory M ratings revealed upon conversion. |
| URI: | http://hdl.handle.net/2451/27409 |
| Appears in Collections: | Finance Working Papers
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