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Federal Reserve Bank of San Francisco
Working Paper Series
Testing the strong-form of market discipline: the effects of public market signals on bank risk
Simon H. Kwan
Abstract

Under the strong-form of market discipline, publicly traded banks that have constantly available public market signals from their stock (and bond) prices would take less risk than non-publicly traded banks because counterparties, borrowers, and regulators could react to adverse public market signals against publicly traded banks. In comparing the credit risk, earnings risk, capitalization, and failure risk between publicly traded and non-publicly traded banks, the evidence in this paper rejects the strong-form of market discipline. In fact, the findings indicate that banking organizations tend to take more risk when they were publicly traded than when they were privately owned.


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Simon H. Kwan, Testing the strong-form of market discipline: the effects of public market signals on bank risk, Federal Reserve Bank of San Francisco, Working Paper Series 2004-19, 2004.
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Keywords: Stock market ; Risk ; Banks and banking
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