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
Date Written: May 2004
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: Suggested Citation