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 quot;too big to fail,quot; 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