Market Discipline in the Banking Industry: Evidence from Spread Dispersion

30 Pages Posted: 16 Nov 2007

Date Written: June 2008

Abstract

Do bond investors price hidden information? This paper addresses this question by using a heteroscedastic regression model to empirically examine the factors affecting the spread dispersion unexplained by easy-to-observe issue characteristics (credit ratings, size, maturity, etc.). First, variables that predict quite accurately the spread for the typical bond, lose their explanatory power for worse-rated, subordinated bonds with longer maturity and smaller face value. This result suggests that investors price hidden information. Second, spread unexplained dispersion increases for open-priced offers, indicating that this price-setting mechanism enhance investors' ability to uncover hidden information. Finally, contrary to prediction, spread unexplained dispersion decreases with the number of banks involved in the syndicate.

Keywords: Banks, Market Discipline, Credit Ratings

JEL Classification: G15, G21, G28

Suggested Citation

Iannotta, Giuliano, Market Discipline in the Banking Industry: Evidence from Spread Dispersion (June 2008). CAREFIN Research Paper No. 6/08, Available at SSRN: https://ssrn.com/abstract=1030295

Giuliano Iannotta (Contact Author)

Università Cattolica ( email )

20123 Milano
Italy

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