Do federal bank examinations add value to the market's supervisory process? To address this question, we investigate whether Federal Reserve inspections of bank holding companies affect the association between banks' reported book value and the market value of their equity. Using data from the...

In principle, market and government supervision provide alternative devices for controlling (governing) any type of corporation. Most national governments have instituted nonmarket regulatory mechanisms for banking firms, on the grounds that market-based mechanisms do not adequately discipline...

With the introduction of Basel II in 2004, “market discipline” became one of the Basel Committee's three pillars of prudential regulation. Although many academic papers have sought to test for the presence of effective market discipline in banking, few have dealt fully with the question....

We examine debenture yields over the period 1983-91 to evaluate the market's sensitivity to bank-specific risks, and conclude that investors have rationally reflected changes in the government's policy toward absorbing private losses in the event of a bank failure. Although this evidence does...

Previous studies of bank subordinated debenture yields have detected scant evidence that market investors rationally price bank-specific default risks. However, investors' incentives to monitor their banks' true default risks have increased over the past decade, as federal regulators have...

Using a large sample of European acquisitions, we find that acquired firms substantially close the gap between their actual and optimal leverage ratios. The bulk of this adjustment occurs quite rapidly – within a year of the acquisition. The typical over-levered firm adjusts its debt-to-assets...

Bank stress tests must be revisable in order to cope with new, emerging risks in the financial sector. Some of these revisions will likely involve model parameters, in addition to the macro-variable shocks that have been applied heretofore. The potential for such revisions would be handicapped...

We present evidence that the Federal Reserve stress tests produce information about both the stress-tested bank holding companies and the overall state of the banking industry. Our evidence goes beyond a standard event study, which cannot differentiate between small abnormal returns and large,...

Government bonds might provide reference entities that reduce corporate bond yield. We study China's 2017 issuance of two U.S. dollars (USD) denominated sovereign bonds when there were (effectively) no outstanding USD sovereigns. We find that USD-denominated Chinese corporate bonds experienced a...

As the recent financial crisis unfolded, a new financial instrument -- contingent capital (“coco”) bonds -- was widely considered as a mechanism for promptly re-capitalizing over-levered financial institutions. Essentially, coco bonds would replace supervisory discretion about banks' capital...