Do Bank Bondholders Price Banks’ Ability to Manage Risk/Return?

48 Pages Posted: 16 Mar 2013 Last revised: 23 Oct 2015

See all articles by Cecile Casteuble

Cecile Casteuble

Université de Rennes1, CREM

Emmanuelle Nys

Université de Limoges, LAPE

Philippe Rous

Université de Limoges, LAPE

Date Written: July 1, 2015

Abstract

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

Casteuble, Cecile and Nys, Emmanuelle and Rous, Philippe, Do Bank Bondholders Price Banks’ Ability to Manage Risk/Return? (July 1, 2015). Available at SSRN: https://ssrn.com/abstract=2232889 or http://dx.doi.org/10.2139/ssrn.2232889

Cecile Casteuble (Contact Author)

Université de Rennes1, CREM ( email )

7, Place Hoche
35000 Rennes
France

Emmanuelle Nys

Université de Limoges, LAPE ( email )

5 rue Félix Eboué
BP 3127
Limoges Cedex 1, 87031
France

Philippe Rous

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

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