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Bank rescues and bailout expectations: The erosion of market discipline during the financial crisis

  • Hett, Florian
  • Schmidt, Alexander

We show that market discipline, defined as the extent to which firm specific risk characteristics are re ected 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 disappearing 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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Paper provided by Research Center SAFE - Sustainable Architecture for Finance in Europe, Goethe University Frankfurt in its series SAFE Working Paper Series with number 36.

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Date of creation: 2013
Date of revision:
Handle: RePEc:zbw:safewp:36
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