Testing the Strong Form of Market Discipline: The Effects of Public Market Signals on Bank Risk

2004-19 | November 1, 2004

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.

Article Citation

H. Kwan, Simon. 2004. “Testing the Strong Form of Market Discipline: The Effects of Public Market Signals on Bank Risk,” Federal Reserve Bank of San Francisco Working Paper 2004-19. Available at https://doi.org/10.24148/wp2004-19

About the Author
Abstract image representing a seat vacancy.
Simon Kwan is a senior research advisor in the Economic Research Department of the Federal Reserve Bank of San Francisco. Learn more about Simon Kwan