The impact of Japan's financial stabilization laws on bank equity values
In the fall of 1998, two important financial regulatory reform acts were passed in Japan. The first of these acts, the Financial Recovery Act, created a bridge bank scheme and provided funds for the resolution of failed banks. The second act, the Rapid Revitalization Act, provided funds for the assistance of troubled banks. While both of these acts provided some government assistance to the banking sector, they also called for reforms aimed at strengthening the regulatory environment. ; Using an event study framework, this paper examines the evidence in equity markets concerning the anticipated impact of the regulatory reforms. Our evidence suggests that the anticipated regulatory impact of the Financial Recovery Act was mixed, while the Rapid Revitalization Act was expected to disporportionately favor weaker Japanese banks. As such, it appears that the market was skeptical about the degree to which the new acts would lead to true banking reform.
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