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

  • Florian Hett

    ()

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

  • Alexander Schmidt

    ()

    (Goethe University Frankfurt and GSEFM, Germany)

Registered author(s):

    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.

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    File URL: http://www.macro.economics.uni-mainz.de/RePEc/pdf/Discussion_Paper_1305.pdf
    File Function: First version, 2013
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    Paper provided by Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz in its series Working Papers with number 1305.

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    Length: 42 pages
    Date of creation: 01 Aug 2013
    Date of revision: 01 Aug 2013
    Handle: RePEc:jgu:wpaper:1305
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