Anticipating Bailouts: the Incentive-Conflict Model and the Collapse of the Ohio Deposit Guarantee Fund

24 Pages Posted: 25 Apr 2003 Last revised: 18 Nov 2007

See all articles by Ramon P. DeGennaro

Ramon P. DeGennaro

University of Tennessee, Knoxville - Department of Finance

James B. Thomson

University of Akron

Multiple version iconThere are 2 versions of this paper

Date Written: June 1994

Abstract

The collapse of the Ohio Deposit Guarantee Fund in March 1985 provides a laboratory for examining the financial market's belief in the incentive-conflict model proposed by Kane (1989). Research in this area has yet to examine the stock returns of federally insured institutions during that period in the context of this model. Thus, it has not addressed the question of whether financial market participants recognize the implications of the model; that is, whether they anticipate the bailouts it implies. This paper fills that void. We find that on average, stocks of firms insured by the poorly capitalized FSLIC do reasonably well during the 41-day event window centered on the ODGF's Bank Holiday, while stocks of firms insured by the relatively well-capitalized FDIC do not. More important, differences in abnormal returns of FDIC and FSLIC firms are consistent with a reaffirmation of the incentive-conflict model.

Keywords: banking, forbearance, ODGF, incentive-conflict

JEL Classification: G21

Suggested Citation

DeGennaro, Ramon P. and Thomson, James B., Anticipating Bailouts: the Incentive-Conflict Model and the Collapse of the Ohio Deposit Guarantee Fund (June 1994). FRB of Cleveland Working Paper No. 94-07. Available at SSRN: https://ssrn.com/abstract=372520 or http://dx.doi.org/10.2139/ssrn.372520

Ramon P. DeGennaro (Contact Author)

University of Tennessee, Knoxville - Department of Finance ( email )

423 Stokely Management Center
Knoxville, TN 37996
United States
865-974-1726 (Phone)
865-974-1716 (Fax)

James B. Thomson

University of Akron ( email )

Akron, OH 44325-4803
United States

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