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Opaque banks, price discovery, and financial instability

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  • Jones, Jeffrey S.
  • Lee, Wayne Y.
  • Yeager, Timothy J.
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    Abstract

    Opacity fosters price contagion that exacerbates the speculative cycles of bubbles and crashes that create financial instability. We find that banks with larger investments in opaque assets benefitted more from intra-industry revaluations associated with announcements of mergers in the period 2000–2006. The findings are robust to controls for competitive effects, spillover effects from higher likelihood of takeover, changes in real estate prices, and interest rates. Non-merger banks that gained most from merger activities also experienced the largest price declines during the subsequent 2007–2008 financial crisis.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Intermediation.

    Volume (Year): 21 (2012)
    Issue (Month): 3 ()
    Pages: 383-408

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    Handle: RePEc:eee:jfinin:v:21:y:2012:i:3:p:383-408

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    Web page: http://www.elsevier.com/locate/inca/622875

    Related research

    Keywords: Banks; Opacity; Merger; Intra-industry revaluation; Financial crisis;

    References

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    Citations

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    Cited by:
    1. Tri Vi Dang & Gary Gorton & Beng Holmstrom & Guillermo Ordonez, 2014. "Banks as Secret Keepers," PIER Working Paper Archive 14-022, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    2. Jeong-Bon Kim & Li Li & Mary L. Z. Ma & Frank M. Song, 2013. "CEO Option Compensation, Risk-Taking Incentives, and Systemic Risk in the Banking Industry," Working Papers 182013, Hong Kong Institute for Monetary Research.
    3. Jones, Jeffrey S. & Lee, Wayne Y. & Yeager, Timothy J., 2013. "Valuation and systemic risk consequences of bank opacity," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 693-706.
    4. Hauck, Achim & Neyer, Ulrike, 2014. "Disagreement between rating agencies and bond opacity: A theoretical perspective," Economics Letters, Elsevier, vol. 123(1), pages 82-85.
    5. Flannery, Mark J. & Kwan, Simon H. & Nimalendran, Mahendrarajah, 2013. "The 2007–2009 financial crisis and bank opaqueness," Journal of Financial Intermediation, Elsevier, Elsevier, vol. 22(1), pages 55-84.
    6. Dumontaux, Nicolas & Pop, Adrian, 2013. "Understanding the market reaction to shockwaves: Evidence from the failure of Lehman Brothers," Journal of Financial Stability, Elsevier, vol. 9(3), pages 269-286.
    7. Dewally, Michaël & Shao, Yingying, 2013. "Financial derivatives, opacity, and crash risk: Evidence from large US banks," Journal of Financial Stability, Elsevier, vol. 9(4), pages 565-577.
    8. Giuliano Iannotta & Simon Kwan, 2013. "Effects of earnings management and delays in loss recognition on bank opacity," Working Paper Series 2013-35, Federal Reserve Bank of San Francisco.

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