The End of Market Discipline? Investor Expectations of Implicit Government Guarantees

Acharya, Viral V.; Anginer, Deniz; Warburton, A. Joseph

doi:10.2139/ssrn.1961656

The End of Market Discipline? Investor Expectations of Implicit Government Guarantees

58 Pages Posted: 19 Nov 2011 Last revised: 12 Jun 2016

Viral V. Acharya

New York University - Leonard N. Stern School of Business; New York University (NYU) - Department of Finance; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI); National Bureau of Economic Research (NBER)

Deniz Anginer

Simon Fraser University (SFU)

A. Joseph Warburton

Syracuse University - College of Law; Syracuse University - Whitman School of Management

Date Written: May 1, 2016

Abstract

Using unsecured bonds traded in the U.S. between 1990 and 2012, we find that bond credit spreads are sensitive to risk for most financial institutions, but not for the largest financial institutions. This “too big to fail” relation between firm size and the risk sensitivity of bond spreads is not seen in the non-financial sectors. The results are robust to using different measures of risk, controlling for bond liquidity, conducting an event study around shocks to investor expectations of government guarantees, examining explicitly and implicitly guaranteed bonds of the same firm, and using agency ratings of government support for financial institutions.

Keywords: Too big to fail, financial crisis, Dodd-Frank, bailout, implicit guarantee, moral hazard, systemic risk

JEL Classification: G21, G24, G28

Suggested Citation: Suggested Citation

Acharya, Viral V. and Anginer, Deniz and Warburton, A. Joseph, The End of Market Discipline? Investor Expectations of Implicit Government Guarantees (May 1, 2016). Available at SSRN: https://ssrn.com/abstract=1961656 or http://dx.doi.org/10.2139/ssrn.1961656