Capital Market Reactions to the Passage of the Financial Services Modernization Act of 1999

36 Pages Posted: 3 Oct 2001

See all articles by Kenneth A. Carow

Kenneth A. Carow

Indiana University - Kelley School of Business - Department of Finance

Randall A. Heron

Indiana University - Kelley School of Business

Abstract

The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act (GLBA), removed most of the remaining barriers between financial companies. Stock market reactions to the passage of GLBA vary across financial sectors and company size. Specifically, we find negative returns for foreign banks, thrifts and finance companies; insignificant returns for banks; and positive returns for investment banks and insurance companies. Additionally, larger non-depository firms have higher returns. The return variation reflects resolution of uncertainty surrounding the final provisions of GLBA, competitive pressures, and expectations of future business combinations. Potential gains from business combinations may arise from economies of scope, market power, and/or from an implicit extension of government guarantees to banking affiliates.

Keywords: Financial institutions, banks, deregulation, event study, financial modernization, GLBA

JEL Classification: G21

Suggested Citation

Carow, Kenneth A. and Heron, Randall A., Capital Market Reactions to the Passage of the Financial Services Modernization Act of 1999. Quarterly Review of Economics and Finance, Vol. 42, pp. 465-485, 2002. Available at SSRN: https://ssrn.com/abstract=285509 or http://dx.doi.org/10.2139/ssrn.285509

Kenneth A. Carow (Contact Author)

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States
317-274-2783 (Phone)
317-274-3312 (Fax)

Randall A. Heron

Indiana University - Kelley School of Business ( email )

Kelley School of Business
801 W. Michigan Street
Indianapolis, IN 46202
United States
317-274-4984 (Phone)

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