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The wealth effects from a subordinated debt policy: evidence from passage of the Gramm-Leach-Bliley Act

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  • Chen, Andrew H.
  • Robinson, Kenneth J.
  • Siems, Thomas F.

Abstract

Using an event study methodology which assumes that returns follow a GARCH (1,1) process, we estimate the wealth effects of a possible subordinated debt policy by examining the stock market reaction to the passage of the Gramm–Leach–Bliley (GLB) Act. A portfolio of banks with relatively high amounts of subordinated debt experienced positive and significant wealth effects associated with passage of the GLB. Portfolios made up of all banks, and those with no subordinated debt experience statistically insignificant wealth effects. We argue that these results suggest that policymakers should consider the use of subordinated debt as a way to enhance market discipline on banks.
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  • Chen, Andrew H. & Robinson, Kenneth J. & Siems, Thomas F., 2004. "The wealth effects from a subordinated debt policy: evidence from passage of the Gramm-Leach-Bliley Act," Review of Financial Economics, Elsevier, vol. 13(1-2), pages 103-119.
    • Handle: RePEc:eee:revfin:v:13:y:2004:i:1-2:p:103-119
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