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Charter value, Tobin's Q and bank risk during the subprime financial crisis

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  • Jones, Jeffrey S.
  • Miller, Scott A.
  • Yeager, Timothy J.

Abstract

Charter value is important in the banking industry because of its ability to reduce the moral hazard incentives that result from government-provided deposit insurance. Previous research suggests that geographic deregulation in the 1970s and 1980s increased competition and eroded charter values. Yet, a common proxy for charter value, Tobin's Q, increased significantly in the 1990s and beyond even as bank deregulation continued. We show that Tobin's Q is a poor cardinal measure of charter value though it still has merit as an ordinal measure. Our findings suggest that charter value has been declining through time, contributing to the increase in risk-taking that led to the subprime financial crisis.

Suggested Citation

  • Jones, Jeffrey S. & Miller, Scott A. & Yeager, Timothy J., 2011. "Charter value, Tobin's Q and bank risk during the subprime financial crisis," Journal of Economics and Business, Elsevier, vol. 63(5), pages 372-391, September.
  • Handle: RePEc:eee:jebusi:v:63:y:2011:i:5:p:372-391
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    References listed on IDEAS

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    Cited by:

    1. Pathan, Shams & Faff, Robert, 2013. "Does board structure in banks really affect their performance?," Journal of Banking & Finance, Elsevier, vol. 37(5), pages 1573-1589.
    2. Valentina Salotti & Natalya A. Schenck & John H. Thornton Jr., 2016. "The Impact Of Real Estate Lending On Thrifts' Franchise Values During The 2007–2009 Crisis: A Comparison With Commercial Banks," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 39(1), pages 35-62, March.
    3. Natalya A. Schenck & John H. Thornton, 2016. "Charter values, bailouts and moral hazard in banking," Journal of Regulatory Economics, Springer, vol. 49(2), pages 172-202, April.
    4. Niu, Jijun, 2012. "An empirical analysis of the relation between bank charter value and risk taking," The Quarterly Review of Economics and Finance, Elsevier, vol. 52(3), pages 298-304.
    5. Egly, Peter V. & Sun, Jun, 2014. "Trading income and bank charter value during the financial crisis: Does derivatives dealer designation matter?," The Quarterly Review of Economics and Finance, Elsevier, vol. 54(3), pages 355-370.

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