Bank Risk - Return Efficiency and Bond Spread: Is There Evidence of Market Discipline in Europe
The aim of this paper is to empirically investigate the relationship between bank risk-return efficiency and bond spread priced in the primary market. Our study is based on a sample of European listed banks for the period 1996-2011. Applying a parametric frontier based on the Battese and Coelli (1993) model, we can compute risk-return efficiency score for each bank at each date. Compared to previous studies, we investigate the effectiveness of market discipline taking into account not only risk and return independently, but also the level of profitability for a given level of risk on the pricing of bond spread. We find that, over the complete sample period, bondholders require a higher spread from more inefficient banks. A closer analysis actually shows that market discipline is not effective during sound economic period, but market investors comes to discipline banks during distressed economic period by pricing lower spread to more efficient banks.
|Date of creation:||2013|
|Note:||View the original document on HAL open archive server: https://hal-unilim.archives-ouvertes.fr/hal-00916717|
|Contact details of provider:|| Web page: https://hal.archives-ouvertes.fr/|
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Julapa Jagtiani & George Kaufman & Catharine Lemieux, 2002. "The Effect of Credit Risk on Bank and Bank Holding Company Bond Yields: Evidence from the Post-FDICIA Period," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 25(4), pages 559-575.
- Douglas D. Evanoff & Larry D. Wall, 2000.
"Subordinated debt and bank capital reform,"
FRB Atlanta Working Paper
2000-24, Federal Reserve Bank of Atlanta.
- Jirí Podpiera & Laurent Weill, 2008.
"Bad luck or bad management? emerging banking market experience,"
ULB Institutional Repository
2013/14305, ULB -- Universite Libre de Bruxelles.
- Podpiera, Jiri & Weill, Laurent, 2008. "Bad luck or bad management? Emerging banking market experience," Journal of Financial Stability, Elsevier, vol. 4(2), pages 135-148, June.
- Jiri Podpiera & Laurent Weill, 2007. "Bad Luck or Bad Management? Emerging Banking Market Experience," Working Papers 2007/5, Czech National Bank, Research Department.
- Sironi, Andrea, 2003.
" Testing for Market Discipline in the European Banking Industry: Evidence from Subordinated Debt Issues,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 35(3), pages 443-472, June.
- Andrea Sironi, 2000. "Testing for market discipline in the European banking industry: evidence from subordinated debt issues," Finance and Economics Discussion Series 2000-40, Board of Governors of the Federal Reserve System (U.S.).
- Evanoff, Douglas D. & Jagtiani, Julapa A. & Nakata, Taisuke, 2011.
"Enhancing market discipline in banking: The role of subordinated debt in financial regulatory reform,"
Journal of Economics and Business,
Elsevier, vol. 63(1), pages 1-22.
- Evanoff, Douglas D. & Jagtiani, Julapa A. & Nakata, Taisuke, 2011. "Enhancing market discipline in banking: The role of subordinated debt in financial regulatory reform," Journal of Economics and Business, Elsevier, vol. 63(1), pages 1-22, January.
- Manuel Arellano & Stephen Bond, 1991.
"Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations,"
Review of Economic Studies,
Oxford University Press, vol. 58(2), pages 277-297.
- Tom Doan, "undated". "RATS program to replicate Arellano-Bond 1991 dynamic panel," Statistical Software Components RTZ00169, Boston College Department of Economics.
- Donald P. Morgan & Kevin J. Stiroh, 1999. "Bond market discipline of banks: is the market tough enough?," Staff Reports 95, Federal Reserve Bank of New York.
- Edwin J. Elton, 2001. "Explaining the Rate Spread on Corporate Bonds," Journal of Finance, American Finance Association, vol. 56(1), pages 247-277, 02.
- Olivier De Jonghe & Mustafa Disli & Koen Schoors, 2012.
"Corporate Governance, Opaque Bank Activities, and Risk/Return Efficiency: Pre- and Post-Crisis Evidence from Turkey,"
Journal of Financial Services Research,
Springer;Western Finance Association, vol. 41(1), pages 51-80, April.
- De Jonghe, O.G. & Disli, M. & Schoors, K., 2011. "Corporate Governance, Opaque Bank Activities, and Risk/Return Efficiency : Pre- and Post-Crisis Evidence from Turkey," Discussion Paper 2011-129, Tilburg University, Center for Economic Research.
- O. De Jonghe & M. Disli & K. Schoors, 2011. "Corporate governance, opaque bank activities, and risk/return efficiency: Pre- and post-crisis evidence from Turkey," Working Papers of Faculty of Economics and Business Administration, Ghent University, Belgium 11/729, Ghent University, Faculty of Economics and Business Administration.
- DeYoung, Robert E. & Hughes, Joseph P. & Moon, Choon-Geol, 2001.
"Efficient risk-taking and regulatory covenant enforcement in a deregulated banking industry,"
Journal of Economics and Business,
Elsevier, vol. 53(2-3), pages 255-282.
- Joseph P. Hughes & Choon-Geol Moon & Robert DeYoung, 2000. "Efficient Risk-Taking and Regulatory Covenant Enforcement in a Deregulated Banking Industry," Departmental Working Papers 200007, Rutgers University, Department of Economics.
- Flannery, Mark J & Sorescu, Sorin M, 1996. " Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983-1991," Journal of Finance, American Finance Association, vol. 51(4), pages 1347-1377, September.
- Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September.
- Donald Morgan & Kevin Stiroh, 2001. "Market Discipline of Banks: The Asset Test," Journal of Financial Services Research, Springer;Western Finance Association, vol. 20(2), pages 195-208, October.
When requesting a correction, please mention this item's handle: RePEc:hal:wpaper:hal-00916717. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (CCSD)
If references are entirely missing, you can add them using this form.