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Testing the strong-form of market discipline: the effects of public market signals on bank risk

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  • Simon H. Kwan

Abstract

Under the strong-form of market discipline, publicly traded banks that have constantly available public market signals from their stock (and bond) prices would take less risk than non-publicly traded banks because counterparties, borrowers, and regulators could react to adverse public market signals against publicly traded banks. In comparing the credit risk, earnings risk, capitalization, and failure risk between publicly traded and non-publicly traded banks, the evidence in this paper rejects the strong-form of market discipline. In fact, the findings indicate that banking organizations tend to take more risk when they were publicly traded than when they were privately owned.

Suggested Citation

  • Simon H. Kwan, 2004. "Testing the strong-form of market discipline: the effects of public market signals on bank risk," Working Paper Series 2004-19, Federal Reserve Bank of San Francisco.
    • Handle: RePEc:fip:fedfwp:2004-19
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    File URL: http://www.frbsf.org/economic-research/files/wp04-19bk.pdf
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    References listed on IDEAS

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    Cited by:

    1. Beverly Hirtle, 2016. "Public disclosure and risk-adjusted performance at bank holding companies," Economic Policy Review, Federal Reserve Bank of New York, issue Aug, pages 151-173.
    2. Cameron Haworth & Liam Gillies & Tobias Irrcher, 2018. "Measuring Market Discipline in New Zealand," Reserve Bank of New Zealand Analytical Notes series AN2018/07, Reserve Bank of New Zealand.
    3. Faidon Kalfaoglou & Alexandros Sarris, 2006. "Modeling the Components of Market Discipline," Working Papers 36, Bank of Greece.
    4. Selçuk Caner & Süheyla Özyıldırım & A. Ungan, 2012. "How Sensitive Are Bank Managers to Shareholder Value?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 42(3), pages 187-205, December.

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