An Empirical Test of the Incentive Effects of Deposit Insurance: The Case of Junk Bonds at Savings and Loan Associations
This paper analyzes how financial markets reacted to S&L diversification into junk bonds. The authors report that junk bond holdings are positively correlated with both the volatility of S&L equity returns and the interest rates paid on large CDs. Next, they examine the impact of junk bonds on equity returns. For poorly capitalized S&Ls, greater risk taking increases the value of deposit insurance and should lead to higher stock returns. However, a well-capitalized institution that increases junk bond holdings should not experience stock price gains. The authors find that this is the case for the sample of S&Ls they studied. Copyright 1994 by Ohio State University Press.
Volume (Year): 26 (1994)
Issue (Month): 1 (February)
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