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

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

See all articles by Viral V. Acharya

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

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

HOME PAGE: http://pages.stern.nyu.edu/~sternfin/vacharya/public_html/~vacharya.htm

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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