Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983-1991

J. OF FINANCE, Vol. 51 No. 4, September 1996

Posted: 18 Jun 1996

See all articles by Mark J. Flannery

Mark J. Flannery

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

Sorin M. Sorescu

Texas A&M University - Department of Finance

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Abstract

We examine debenture yields over the period 1983-91 to evaluate the market's sensitivity to bank-specific risks, and conclude that investors have rationally reflected changes in the government's policy toward absorbing private losses in the event of a bank failure. Although this evidence does not establish that market discipline can effectively control banking firms, it soundly rejects the hypothesis that investors cannot rationally differentiate among the risks undertaken by the major U.S. banking firms.

JEL Classification: G21

Suggested Citation

Flannery, Mark Jeffrey and Sorescu, Sorin M., Evidence of Bank Market Discipline in Subordinated Debenture Yields: 1983-1991. J. OF FINANCE, Vol. 51 No. 4, September 1996. Available at SSRN: https://ssrn.com/abstract=7530

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)

Sorin M. Sorescu (Contact Author)

Texas A&M University - Department of Finance ( email )

430 Wehner
College Station, TX 77843-4218
United States
979-458-0380 (Phone)

HOME PAGE: http://wehner.tamu.edu/finc.www/ssorescu/

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