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Bank Bailouts and Market Discipline: How Bailout Expectations Changed During the Financial Crisis

Author

Listed:
  • Florian Hett

    (Department of Economics, Johannes Gutenberg-Universitaet Mainz, Germany)

  • Alexander Schmidt

    (Goethe University Frankfurt and GSEFM, Germany)

Abstract

We show that market discipline, defined as the extent to which frm specific risk characteristics are reflected in market prices, eroded during the recent financial crisis in 2008. We design a novel test of changes in market discipline based on the relation between firm specific risk characteristics and debt-to-equity hedge ratios. We find that market discipline already weakened after the rescue of Bear Stearns before disappear- ing almost entirely after the failure of Lehman Brothers. The effect is stronger for investment banks and large financial institutions, while there is no comparable effect for non-financial firms.

Suggested Citation

  • Florian Hett & Alexander Schmidt, 2013. "Bank Bailouts and Market Discipline: How Bailout Expectations Changed During the Financial Crisis," Working Papers 1305, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 01 Aug 2013.
  • Handle: RePEc:jgu:wpaper:1305
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    File URL: https://download.uni-mainz.de/RePEc/pdf/Discussion_Paper_1305.pdf
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    References listed on IDEAS

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    Cited by:

    1. Rudolph, Bernd, 2014. "Bankregulierung zur Lösung des „too big to fail“-Problems," Die Unternehmung - Swiss Journal of Business Research and Practice, Nomos Verlagsgesellschaft mbH & Co. KG, vol. 68(2), pages 72-91.
    2. Hryckiewicz, Aneta & Kozlowski, Lukasz, 2014. "Banking business models and the nature of financial crises," MPRA Paper 64072, University Library of Munich, Germany, revised 09 Mar 2015.

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    More about this item

    Keywords

    Bailout; Implicit Guarantees; Too-Big-To-Fail; Market Discipline;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • 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
    • H81 - Public Economics - - Miscellaneous Issues - - - Governmental Loans; Loan Guarantees; Credits; Grants; Bailouts

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