Testing the Strong-Form of Market Discipline: The Effects of Public Market Signals on Bank Risk

FRB of San Francisco Working Paper No. 2004-19

41 Pages Posted: 15 Dec 2004

See all articles by Simon H. Kwan

Simon H. Kwan

Federal Reserve Bank of San Francisco

Date Written: May 2004

Abstract

Under the strong-form of market discipline, publicly traded banks that have constantly available public market signals from their stock (and bond) prices would take less risk than non-publicly traded banks because counterparties, borrowers, and regulators could react to adverse public market signals against publicly traded banks. In comparing the credit risk, earnings risk, capitalization, and failure risk between publicly traded and non-publicly traded banks, the evidence in this paper rejects the strong-form of market discipline. In fact, the findings indicate that banking organizations tend to take more risk when they were publicly traded than when they were privately owned.

Keywords: Market discipline, bank risk-taking

JEL Classification: G21, G32, G34

Suggested Citation

Kwan, Simon H., Testing the Strong-Form of Market Discipline: The Effects of Public Market Signals on Bank Risk (May 2004). FRB of San Francisco Working Paper No. 2004-19. Available at SSRN: https://ssrn.com/abstract=631844 or http://dx.doi.org/10.2139/ssrn.631844

Simon H. Kwan (Contact Author)

Federal Reserve Bank of San Francisco ( email )

101 Market Street
San Francisco, CA 94105
United States
415-974-3190 (Phone)

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