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Equity market information, bank holding company risk, and market discipline

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Author Info

  • Curry, Timothy J.
  • Fissel, Gary S.
  • Hanweck, Gerald A.

Abstract

For market discipline to be effective, market factors such as changes in firm equity and debt values and returns, must influence firm decision making. In banking, this can occur directly via bank management or indirectly though supervisory examinations and oversight influencing bank management. In this study, we investigate whether equity market variables can provide timely information and add value to accounting models that predict changes in bank holding company (BOPEC) risk ratings over the 1988-2000 period. Using a variety of equity market indicators, the findings suggest that one-quarter lagged market data adds forecast value to lagged financial statement data and prior supervisory information in the logistic regressions. Furthermore, using extensive out-of-sample testing for the years 2001-2003, we find: (1) that multiple models estimated over different phases of the business and banking cycles are superior to a single model for forecasting BOPEC rating changes; (2) that equity data adds economically significant power in forecasting BOPEC rating upgrades and performs well for identifying no changes; (3) that for downgrades, the accounting model forecasts the best; (4) that modeling the three possible risk ratings categories simultaneously (downgrade, no change and upgrade) minimizes both Type I and Type II classification errors; and (5) that using multiple models to forecast risk ratings enhances the overall percentage of correct classifications.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 32 (2008)
Issue (Month): 5 (May)
Pages: 807-819

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Handle: RePEc:eee:jbfina:v:32:y:2008:i:5:p:807-819

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  1. Krainer, John & Lopez, Jose A, 2004. "Incorporating Equity Market Information into Supervisory Monitoring Models," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 36(6), pages 1043-67, December.
  2. Allen N. Berger & Sally M. Davies & Mark J. Flannery, 2000. "Comparing market and supervisory assessments of bank performance: who knows what when?," Proceedings, Federal Reserve Bank of Cleveland, pages 641-670.
  3. Merton, Robert C., 1973. "On the pricing of corporate debt: the risk structure of interest rates," Working papers 684-73., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  4. Francesco Cannata & Mario Quagliariello, 2005. "The Value of Market Information in Banking Supervision: Evidence from Italy," Journal of Financial Services Research, Springer, Springer, vol. 27(2), pages 139-162, April.
  5. Mark Flannery, 2001. "The Faces of “Market Discipline”," Journal of Financial Services Research, Springer, Springer, vol. 20(2), pages 107-119, October.
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Cited by:
  1. Liao, Hsien-Hsing & Chen, Tsung-Kang & Lu, Chia-Wu, 2009. "Bank credit risk and structural credit models: Agency and information asymmetry perspectives," Journal of Banking & Finance, Elsevier, Elsevier, vol. 33(8), pages 1520-1530, August.
  2. Selçuk Caner & Süheyla Özyıldırım & A. Ungan, 2012. "How Sensitive Are Bank Managers to Shareholder Value?," Journal of Financial Services Research, Springer, Springer, vol. 42(3), pages 187-205, December.
  3. Distinguin, Isabelle & Kouassi, Tchudjane & Tarazi, Amine, 2013. "Interbank deposits and market discipline: Evidence from Central and Eastern Europe," Journal of Comparative Economics, Elsevier, vol. 41(2), pages 544-560.
  4. Harashima, Taiji, 2011. "A Mechanism of Cyclical Volatility in the Vacancy-Unemployment Ratio: What Is the Source of Rigidity?," MPRA Paper 32476, University Library of Munich, Germany.
  5. Harashima, Taiji, 2009. "Depression as a Nash Equilibrium Consisting of Strategies of Choosing a Pareto Inefficient Transition Path," MPRA Paper 18953, University Library of Munich, Germany.
  6. Chan, Chia-Ying & Lo, Huai-Chun & Su, Yi-Ru, 2014. "Distribution of stock ratings and analyst recommendation revision," The North American Journal of Economics and Finance, Elsevier, vol. 28(C), pages 273-286.
  7. Gaul, Lewis & Palvia, Ajay, 2013. "Are regulatory management evaluations informative about bank accounting returns and risk?," Journal of Economics and Business, Elsevier, Elsevier, vol. 66(C), pages 1-21.
  8. Akhigbe, Aigbe & Madura, Jeff & Marciniak, Marek, 2012. "Bank capital and exposure to the financial crisis," Journal of Economics and Business, Elsevier, Elsevier, vol. 64(5), pages 377-392.
  9. Francesco Cannata & Mario Quagliariello, . "Market and Supervisory Information: Some Evidence from Italian Banks," Discussion Papers, Department of Economics, University of York 04/04, Department of Economics, University of York.
  10. repec:hal:journl:hal-00785449 is not listed on IDEAS

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