The Information Content of Bank Exam Ratings and Subordinated Debt Prices

Posted: 6 Mar 2001

See all articles by Robert DeYoung

Robert DeYoung

University of Kansas School of Business

Mark J. Flannery

University of Florida - Department of Finance, Insurance and Real Estate

William W. Lang

Promontory Financial Group

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Abstract

An important question for bank regulatory policy is whether supervisory examinations of large commercial banking firms - institutions that are already actively followed by many investors and their private sector agents - produce useful information that is not already reflected in market prices. We investigate this question using a new research methodology and a unique data set of national bank exam ratings and subordinated debt risk spreads for their parent holding companies. We find that government exams do produce significant new information that is value-relevant to financial markets; that debenture prices do not fully reflect this new information until several quarters after an exam; and that on net markets price the likely regulatory actions implied by this new information. These results have implications for the balance of market vs. regulatory discipline at large banking firms, and for proposals to make subordinated debt issues mandatory for these firms.

Keywords: Commercial banks, bank exam ratings, subordinated debt, market efficiency

JEL Classification: G21, G28, G34, G14.

Suggested Citation

DeYoung, Robert and Flannery, Mark Jeffrey and Lang, William W., The Information Content of Bank Exam Ratings and Subordinated Debt Prices. Journal of Money, Credit, and Banking. Available at SSRN: https://ssrn.com/abstract=254409

Robert DeYoung (Contact Author)

University of Kansas School of Business ( email )

Capitol Federal Hall
1654 Naismith Drive
Lawrence, KS 66045
United States
785-864-1806 (Phone)

Mark Jeffrey Flannery

University of Florida - Department of Finance, Insurance and Real Estate ( email )

P.O. Box 117168
Gainesville, FL 32611
United States
352-392-3184 (Phone)
352-392-0103 (Fax)

William W. Lang

Promontory Financial Group ( email )

1201 Pennsylvania Avenue, NW
Suite 617
Washington, DC 20004
United States

HOME PAGE: http://www.promontory.com

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