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The Economic Impact of the Dodd-Frank Act on Systemically Important Financial Firms: Evidence from Market Reactions

52 Pages Posted: 31 Aug 2011 Last revised: 17 Apr 2013

Yu Gao

University of Minnesota - Carlson School of Management

Scott Liao

University of Toronto - Rotman School of Management

Xue Wang

Ohio State University - Fisher College of Business

Date Written: April 2013

Abstract

We examine stock and bond market reactions to the key events leading to the passage of the Dodd-Frank Act to provide empirical evidence on the economic impact of the Act on systemically important financial firms. Using large foreign financial institutions and small/medium sized domestic financial institutions as control groups, we find that large financial institutions overall had negative abnormal stock returns and positive abnormal bond returns in response to these events. Further, we find that systemically more important and more interconnected financial institutions initially experienced more negative abnormal stock returns and more positive abnormal bond returns, followed by a reversal of these relations during the final phase of the legislative process. On the other hand, we find that both shareholders and bondholders of the Big 6 banks initially experienced strong negative returns, followed by a reversal of these negative returns during the final phase of the passage. These results suggest that the markets expect the early, but not the final version of the bill to have the potential to reduce risk-taking and to end the too-big-to-fail policy.

Suggested Citation

Gao, Yu and Liao, Scott and Wang, Xue, The Economic Impact of the Dodd-Frank Act on Systemically Important Financial Firms: Evidence from Market Reactions (April 2013). Available at SSRN: https://ssrn.com/abstract=1919630 or http://dx.doi.org/10.2139/ssrn.1919630

Yu Gao

University of Minnesota - Carlson School of Management ( email )

19th Avenue South
Minneapolis, MN 55455
United States
(612)624-1075 (Phone)

Wei-Yi (Scott) Liao (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

Xue Wang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-1330 (Phone)
614-292-2118 (Fax)

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