Deposit insurance is a put option that encourages excessive risk taking by banks. Excess litigation against a bank, a form of operational risk, is one indicator of risk because litigation often reflects a failure to maintain a strong system of internal control. We analyze five different measures...

We find that banks with more capital experienced more severe stock price declines during the recent financial crisis. We also find that banks with more capital experienced higher betas and stock volatility levels during the financial crisis. These results support the capital signaling...