Market Discipline and the Use of Stock Market Data to Predict Bank Financial Distress

Posted: 18 May 2006

See all articles by Amine Tarazi

Amine Tarazi

University of Limoges - Faculty of Law and Economic Science

Isabelle Distinguin

Université de Limoges, LAPE

Philippe Rous

University of Limoges

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Abstract

We assess the extent to which stock market information can be used to estimate leading indicators of bank financial distress. We specify a logit early warning model, designed for European banks, which tests if market based indicators add predictive value to models relying on accounting data. We also study the robustness of the link between market information and financial downgrading in the light of the safety net and asymmetric information hypotheses. Some of our results support the use of market-related indicators. Other results show that the accuracy of the predictive power depends on the extent to which bank liabilities are market traded.

Keywords: Bank, Market Discipline, Bank Risk, Market Prices

JEL Classification: G21, G28

Suggested Citation

Tarazi, Amine and Distinguin, Isabelle and Rous, Philippe, Market Discipline and the Use of Stock Market Data to Predict Bank Financial Distress. Journal of Financial Services Research, 2006, Available at SSRN: https://ssrn.com/abstract=903102

Amine Tarazi (Contact Author)

University of Limoges - Faculty of Law and Economic Science ( email )

5 rue Felix Eboue
Limoges, 87000
France

Isabelle Distinguin

Université de Limoges, LAPE ( email )

5 rue Félix Eboué BP3127
LIMOGES, 87031
France

Philippe Rous

University of Limoges ( email )

rue François Mitterrand
Limoges Cedex, FL Limoges 87031
France

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