The Value of a Government Monitor for U.S. Banking Firms

Posted: 14 Sep 1998

See all articles by Mark J. Flannery

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

Joel F. Houston

University of Florida - Department of Finance, Insurance and Real Estate

Abstract

Do federal bank examinations add value to the market's supervisory process? To address this question, we investigate whether Federal Reserve inspections of bank holding companies affect the association between banks' reported book value and the market value of their equity. Using data from the fourth quarters of 1988 and 1990, we find that the market is aware of bank examinations and takes them into account when valuing bank stocks. Apart from the obvious value they provide to regulators, examinations affect market values in several ways. In some instances, they provide useful certifying information which reduces risk and increases market value. In other instances, examinations induce additional regulatory risk which may reduce market value. The net effect of these results appears to vary over time, and across different types of banks.

JEL Classification: G12, G21, G28

Suggested Citation

Flannery, Mark Jeffrey and Houston, Joel F., The Value of a Government Monitor for U.S. Banking Firms. Journal of Money, Credit, and Banking, Vol. 31, No. 1, February 1999. Available at SSRN: https://ssrn.com/abstract=121453

Mark Jeffrey Flannery (Contact Author)

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

Joel F. Houston

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States

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