CHANGES IN MARKET PERCEPTION OF RISKINESS: THE CASE OF TOO‐BIG‐TO‐FAIL

In 1984, the Comptroller of the Currency stated that the eleven largest banking firms were “too big to fail,” implying they would receive de facto 100 percent deposit insurance. The question is whether this announcement altered the market's perception of the riskiness of all banking organizatio...

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Bibliographic Details
Published in:The Journal of financial research 1997-10, Vol.20 (3), p.389-406
Main Authors: Black, Harold A., Collins, M. Cary, Robinson, Breck L., Schweitzer, Robert L.
Format: Article
Language:English
Subjects:
Bank holding companies
Banking industry
Comptrollers
Default
Deposit insurance
Dividend policy
Institutional investments
Insurance coverage
Ownership changes
Regulation of financial institutions
Risk assessment
Securities markets
Statistical analysis
Studies
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Summary:In 1984, the Comptroller of the Currency stated that the eleven largest banking firms were “too big to fail,” implying they would receive de facto 100 percent deposit insurance. The question is whether this announcement altered the market's perception of the riskiness of all banking organizations, not just those included in the Comptroller's statement. We address this question with two tests. First, through the examination of changes in institutional equity ownership from 1980 through 1988, we find that the announcement is associated with increases in institutional ownership at a time when a comparable set of nonfinancial firms saw reductions in institutional holdings. Second, through the examination of stock returns behavior of bank holding companies around announcements of dividend cuts and omissions from 1974 through 1991, we find that the Comptroller's 1984 announcement altered the market's reaction to dividend cuts and omissions by bank holding companies not specifically included in the Comptroller's statement.
ISSN:0270-2592
1475-6803
DOI:10.1111/j.1475-6803.1997.tb00256.x