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; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); New York University (NYU) - Department of Finance

Deniz Anginer

World Bank Research

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
New York, NY NY 10012
United States

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

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

New York University (NYU) - Department of Finance

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

Deniz Anginer (Contact Author)

World Bank Research ( email )

1818 H Street, NW
Washington, DC 20433
United States

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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