The End of Market Discipline? Investor Expectations of Implicit Government Guarantees
Viral V. Acharya
New York University - Leonard N. Stern School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance
Virginia Tech Pamplin Business School
A. Joseph Warburton
Syracuse University - College of Law; Syracuse University - Whitman School of Management
May 1, 2016
Using unsecured bonds traded in the U.S. between 1990 and 2012, we find that bond credit spreads are sensitive to risk for most financial institutions, but not for the largest financial institutions. This “too big to fail” relation between firm size and the risk sensitivity of bond spreads is not seen in the non-financial sectors. The results are robust to using different measures of risk, controlling for bond liquidity, conducting an event study around shocks to investor expectations of government guarantees, examining explicitly and implicitly guaranteed bonds of the same firm, and using agency ratings of government support for financial institutions.
Number of Pages in PDF File: 58
Keywords: Too big to fail, financial crisis, Dodd-Frank, bailout, implicit guarantee, moral hazard, systemic risk
JEL Classification: G21, G24, G28
Date posted: November 19, 2011 ; Last revised: June 12, 2016
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