Do Bank Bondholders Price Banks’ Ability to Manage Risk/Return?
48 Pages Posted: 16 Mar 2013 Last revised: 23 Oct 2015
Date Written: July 1, 2015
We empirically investigate whether bank bondholders value bank managerial ability, measured as risk-return efficiency, when pricing bond spreads. We find, based on a sample of 1,924 bonds issued by 67 European listed banks, for the period 2002-2011, evidence that bank managerial ability affects bond spreads, banks with more capable managers obtain a lower cost of debt. In particular our results show that bank bondholders are always sensitive to bank managerial ability when pricing bonds, both in time of distress and sound periods, while the default proxy is only significant during the time of distress.
Keywords: bank efficiency, risk-return efficiency, bond spread, market discipline, stochastic frontier analysis
JEL Classification: G21, G24, G28, G32
Suggested Citation: Suggested Citation