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Market Discipline and the Use of Stock Market Data to Predict Bank Financial Distress

Author

Listed:
  • Isabelle Distinguin

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

  • Philippe Rous

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

  • Amine Tarazi

    (LAPE - Laboratoire d'Analyse et de Prospective Economique - GIO - Gouvernance des Institutions et des Organisations - UNILIM - Université de Limoges)

Abstract

We assess the extent to which stock market information can be used to estimate leading indicators of bank financial distress. We specify a logit early warning model, designed for European banks, which tests if market based indicators add predictive value to models relying on accounting data. We also study the robustness of the link between market information and financial downgrading in the light of the safety net and asymmetric information hypotheses. Some of our results support the use of market-related indicators. Other results show that the accuracy of the predictive power depends on the extent to which bank liabilities are market traded.

Suggested Citation

  • Isabelle Distinguin & Philippe Rous & Amine Tarazi, 2006. "Market Discipline and the Use of Stock Market Data to Predict Bank Financial Distress," Post-Print hal-00794214, HAL.
    • Handle: RePEc:hal:journl:hal-00794214
    DOI: 10.1007/s10693-0016-6
    Note: View the original document on HAL open archive server: https://unilim.hal.science/hal-00794214v1
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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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