Do Markets React to Bank Examination Ratings? Evidence of Indirect Disclosure of Management Quality Through Bhcs' Applications to Convert to Fhcs

32 Pages Posted: 11 Nov 2008

See all articles by Linda Allen

Linda Allen

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance

Julapa Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia

James T. Moser

American University - Kogod School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: October 2000

Abstract

Certain nonrecurring circumstances associated with the passage of the Financial Services Modernization Act of 1999 have created a unique opportunity for the market to obtain bank examination ratings of management quality. We utilize this natural experiment in order to determine how the market views this heretofore private information. We find that the stock market utilizes bank examination ratings in order to reveal regulatory intent, rather than simply as information about management quality. Revelation of unsatisfactory M ratings (denoted â¬Sbad newsâ¬?) causes BHC stock returns and market risk betas to increase, whereas revelation of acceptable M ratings (â¬Sgood newsâ¬?) causes BHC stock returns and market risk betas to decrease. The market thrives on â¬Sbad newsâ¬? because unsatisfactory M ratings indicate that regulatory intervention is likely to occur, possibly benefiting both shareholders and creditors. On the other hand, revelation of acceptable M ratings (â¬Sgood newsâ¬?) indicates that bank regulators are unprepared to intervene in the near future. Moreover, we find lower bond spreads for a subsample of FHCs with satisfactory M ratings revealed upon conversion.

Suggested Citation

Allen, Linda and Jagtiani, Julapa A. and Moser, James T., Do Markets React to Bank Examination Ratings? Evidence of Indirect Disclosure of Management Quality Through Bhcs' Applications to Convert to Fhcs (October 2000). NYU Working Paper No. S-FI-00-04. Available at SSRN: https://ssrn.com/abstract=1298863

Linda Allen (Contact Author)

City University of New York, Baruch College - Zicklin School of Business - Department of Economics and Finance ( email )

17 Lexington Avenue
New York, NY 10010
United States
646-312-3463 (Phone)
646-312-3451 (Fax)

HOME PAGE: http://stern.nyu.edu/~lallen

Julapa A. Jagtiani

Federal Reserve Banks - Federal Reserve Bank of Philadelphia ( email )

Ten Independence Mall
Philadelphia, PA 19106-1574
United States

James T. Moser

American University - Kogod School of Business ( email )

4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States

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