The Market Response to Federal Inspections of U.S. Bank Holding Companies

Posted: 11 May 2000

See all articles by Mark J. Flannery

Mark J. Flannery

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

Joel F. Houston

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

Abstract

Do federal bank examinations add value to the market's supervisory process? To address this question, we investigate whether Federal Reserve inspections of bank holding companies have affected the association between banks' reported book values and the market value of their equity. Using data from the fourth quarters of 1988 and 1990, we find that government examinations significantly affected the market's interpretation of reported book values, although the particular effects vary between years and according to a bank's size and capitalization. In 1988, on-site examinations raised bank market values significantly (except for banks with low capitalization), while the 1990 exams had no significant effect on the average bank's market value. While our results imply that examinations can be valuable within the current institutional environment, we recognize that the same benefits could perhaps be realized through other mechanisms, such as increased use of private auditors or other forms of market discipline. In this respect, the social value of holding company inspections remains an open question.

JEL Classification: G21, G58

Suggested Citation

Flannery, Mark Jeffrey and Houston, Joel F., The Market Response to Federal Inspections of U.S. Bank Holding Companies. Available at SSRN: https://ssrn.com/abstract=5990

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)

Joel F. Houston (Contact Author)

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

P.O. Box 117168
Gainesville, FL 32611
United States

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