Information and the market's perceptions of Japanese bank risk: Regulation, environment, and disclosure

As Japanese asset prices declined in the post-bubble period, bank risk increased substantially. Yet, bank regulators suppressed individual bank information and practiced systemic forbearance in a convoy policy that protected weak banks. Was there sufficient information available to investors that al...

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Bibliographic Details
Published in:Pacific-Basin finance journal 2002-04, Vol.10 (2), p.119-139
Main Authors: Bremer, Marc, Pettway, Richard H
Format: Article
Language:English
Subjects:
Banks
Bond ratings
Information disclosure
Japan
Market efficiency
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Summary:As Japanese asset prices declined in the post-bubble period, bank risk increased substantially. Yet, bank regulators suppressed individual bank information and practiced systemic forbearance in a convoy policy that protected weak banks. Was there sufficient information available to investors that allowed the market for bank stocks to reflect different risk levels, even though regulators tightly controlled the information and even engaged in disinformation? This research examines the prices of the stock of banks that were subsequently downgraded by Moody's Investors Services during the 1986–1998 period. We find that the market does impose a significant penalty before as well as at the time of downgrades in creditworthiness by Moody's. Share prices adjust to changing levels of risk. Thus, there is evidence of sufficient information for investors to discriminate among banks with different levels of risk.
ISSN:0927-538X
1879-0585
DOI:10.1016/S0927-538X(01)00033-6