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Changes in Market Perception of Riskiness: The Case of Too-Big-to-Fail

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  • Black, Harold A
  • et al

Abstract

In 1984, the Comptroller of the Currency stated that the eleven largest banking firms were "too big to fail," implying they would receive de facto 100 percent deposit insurance. The question is whether this announcement altered the market's perception of the riskiness of all banking organizations, not just those included in the Comptroller's statement. We address this question with two tests. First, through the examination of changes in institutional equity ownership from 1980 through 1988, we find that the announcement is associated with increases in institutional ownership at a time when a comparable set of nonfinancial firms saw reductions in institutional holdings. Second, through the examination of stock returns behavior of bank holding companies around announcements of dividend cuts and omissions from 1974 through 1991, we find that the Comptroller's 1984 announcement altered the market's reaction to dividend cuts and omissions by bank holding companies not specifically included in the Comptroller's statement. Coauthors are M. Cary Collins, Breck L. Robinson, and Robert L. Schweitzer.

Suggested Citation

  • Black, Harold A & et al, 1997. "Changes in Market Perception of Riskiness: The Case of Too-Big-to-Fail," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 20(3), pages 389-406, Fall.
  • Handle: RePEc:bla:jfnres:v:20:y:1997:i:3:p:389-406
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    References listed on IDEAS

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    1. Stone, Bernell K., 1974. "Systematic Interest-Rate Risk in a Two-Index Model of Returns," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 9(05), pages 709-721, November.
    2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, pages 14-23.
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    7. Moyer, R. Charles & Chatfield, Robert E. & Sisneros, Phillip M., 1989. "Security Analyst Monitoring Activity: Agency Costs and Information Demands," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(04), pages 503-512, December.
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    Cited by:

    1. Gorton, Gary & Winton, Andrew, 2003. "Financial intermediation," Handbook of the Economics of Finance,in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, edition 1, volume 1, chapter 8, pages 431-552 Elsevier.
    2. Cornett, Marcia Millon & McNutt, Jamie John & Strahan, Philip E. & Tehranian, Hassan, 2011. "Liquidity risk management and credit supply in the financial crisis," Journal of Financial Economics, Elsevier, vol. 101(2), pages 297-312, August.
    3. Koetter, Michael, 2006. "The stability of efficiency rankings when risk-preferences and objectives are different," Discussion Paper Series 2: Banking and Financial Studies 2006,08, Deutsche Bundesbank.
    4. Mark M. Spiegel & Nobuyoshi Yamori, 2000. "The evolution of "too-big-to-fail" policy in Japan: evidence from market equity values," Pacific Basin Working Paper Series 00-01, Federal Reserve Bank of San Francisco.
    5. Phil Molyneux & Klaus Schaeck & Tim Zhou, 2011. "‘Too Systemically Important to Fail’ in Banking," Working Papers 11011, Bangor Business School, Prifysgol Bangor University (Cymru / Wales).
    6. W. Scott Frame & Larry D. Wall, 2002. "Financing housing through government-sponsored enterprises," Economic Review, Federal Reserve Bank of Atlanta, issue Q1, pages 29-43.
    7. Blank, Sven & Buch, Claudia M. & Neugebauer, Katja, 2009. "Shocks at large banks and banking sector distress: The Banking Granular Residual," Journal of Financial Stability, Elsevier, vol. 5(4), pages 353-373, December.
    8. Molyneux, Philip & Schaeck, Klaus & Zhou, Tim Mi, 2014. "‘Too systemically important to fail’ in banking – Evidence from bank mergers and acquisitions," Journal of International Money and Finance, Elsevier, vol. 49(PB), pages 258-282.
    9. William F. Bassett & Thomas F. Brady, 2002. "What drives the persistent competitiveness of small banks?," Finance and Economics Discussion Series 2002-28, Board of Governors of the Federal Reserve System (U.S.).

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