The Relation between Market Discipline of Banks and Bond Market Transparency: Evidence from the Risk Sensitivity of Subordinated Notes and Debenture Yield Spreads

42 Pages Posted: 19 Mar 2011

See all articles by Bhanu Balasubramanian

Bhanu Balasubramanian

University of Akron - College of Business Administration - Department of Finance

Ken B. Cyree

University of Mississippi - School of Business Administration

Date Written: March 14, 2011

Abstract

We investigate the effects of increased bond market transparency on the risk sensitivity of yield spreads for bank-issued subordinated notes and debentures after bond markets became more transparent in 2002. Models of yield spread levels and yield spread changes show improvement in normal economic times after markets became more transparent. Risk-sensitivity of yield spreads increases strongly prior to crises. We show that firm-specific default risk variables are significant determinants of yield spread changes around earnings announcements and we observe a stronger effect for lower rated bonds. Our results imply that market discipline poorly complements regulatory discipline during good economic times. In general, increased transparency improves risk sensitivity in all cases.

Keywords: Subordinated debt, Yield spread, risk sensitivity, Default risk, Financial Crisis

JEL Classification: G01, G20, G21, G28

Suggested Citation

Balasubramanian, Bhanu and Cyree, Ken B., The Relation between Market Discipline of Banks and Bond Market Transparency: Evidence from the Risk Sensitivity of Subordinated Notes and Debenture Yield Spreads (March 14, 2011). Available at SSRN: https://ssrn.com/abstract=1785823 or http://dx.doi.org/10.2139/ssrn.1785823

Bhanu Balasubramanian (Contact Author)

University of Akron - College of Business Administration - Department of Finance ( email )

259 S. Broadway
Akron, OH 44325
United States

Ken B. Cyree

University of Mississippi - School of Business Administration ( email )

PO Box 3986
Oxford, MS 38677
United States

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