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

71 Pages Posted: 19 Nov 2011 Last revised: 3 Jul 2022

See all articles by Viral V. Acharya

Viral V. Acharya

Professor; 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. from 1990 to 2020, we examine the sensitivity of credit spreads to changes in firm risk. In the time period preceding the implementation of the Dodd-Frank Act, we find that credit spreads were less sensitive to risk for large financial firms compared to small financial firms and compared to large non-financial firms. This lack of spread-risk sensitivity is consistent with investors expecting government guarantees on unsecured debt of large financial firms. In the post-Dodd Frank period after 2012, we do not observe differences in this sensitivity by firm size. These results are consistent with a strengthening of market discipline in the aftermath of the policy reforms implemented following the financial crisis.

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

JEL Classification: G21, G24, G28

Suggested Citation

Acharya, Viral V. and 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

Viral V. Acharya

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
2129980354 (Phone)
2129954256 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~vacharya

Professor ( email )

44 West 4th Street
Suite 9-160
New York, NY NY 10012
United States
2129980354 (Phone)
2129954256 (Fax)

HOME PAGE: http://www.stern.nyu.edu/~vacharya

New York University (NYU) - Department of Finance

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Deniz Anginer (Contact Author)

Simon Fraser University (SFU) ( email )

8888 University Drive
Burnaby, British Columbia V5A 1S6
Canada

A. Joseph Warburton

Syracuse University - College of Law ( email )

Syracuse, NY 13244-1030
United States

Syracuse University - Whitman School of Management ( email )

Syracuse, NY
United States

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