The Brazilian default announcement and the contagion effect hypothesis

Karafiath, Imre; Mynatt, Ross; Smith, Kenneth L.

doi:10.1016/0378-4266(91)90093-2

Cited by 63 publications

(29 citation statements)

References 16 publications

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“…Finally, Bruner and Simms (1987) found that equity market prices did not fuily reflect Mexican loan exposures until about six days after the moratorium announcement. [Karafiath, Mynatt, and Smith (1991) replicate the equity market findings for a larger sample of forty-six banks, using a more sophisticated statistical model.] In the absence of reliable information on loan exposure, investors appear to respond to surprising news rationally and quickly" (p.54).…”

Section: Other Studies Related To the Efficiency Of Bank Stock Pricesmentioning

confidence: 64%

Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence

Flannery¹

1998

Journal of Money, Credit and Banking

552

261

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JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.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 firrns, on the grounds that market-based mechanisms do not adequately discipline banks. But what evidence supports this assessment? Why must governments assure bank solvency, but not the solvency of other firms? Government oversight naturally displaces private efforts to evaluate and control financial firrns. Moreover, if the banking business changes over time-as it assuredly has in the past decade or twthe best combination of government and private supervision may change concurrently. This paper reviews and evaluates the growing empirical literature on private investors' abilities to assess the financial condition of banking firms. The evidence supports the proposition that market investors and analysts could reasonably provide a greater proportion of coxporate governance services for large, traded U.S. financial firms. (who first suggested this topic). Bart Danielsen provided research assistance. MARK 1. The United States has most severely limited the investment banking activities of commercial banks. U.S. banks are also entirely excluded from participating in nonfinancial commerce.2. U.S. banks may undertake many activities only through separate holding company affiliates, unlike the "universal bank" form of organization that is common in Europe. The Federal Reserve has long insisted that a BHC should serve as a "source of strength" for its subsidiary banks, and FIRREA formalized this requirement. With private corporate governance, individual firms could negotiate whether or not to eschew this limited liability protection for their banking subsidiaries.3. U.S. ownership restrictions preclude a firm from controlling both financial and commercial businesses. The market for corporate control in banking is consequently weaker than in other sectors of the economy (Prowse 1997; Gorton and Rosen 1995; Hubbard and Pallia 1995).4. Increased reliance on private assessments has been particularly important in the design of U.S. capital standards for market risk exposure. These standards use a bank' s own internal models to measure its risk exposure, on the grounds that a regulator cannot assess risk more accurately than the bankers themselves do.5. Gilbert ( 1990) and Berger ( 1991 ) evaluated the earlier parts of this literature, but many important institutional and regulatory changes have occurred since those reviews were undertaken. This content downloaded from 128.6.218.72 on Fri, 10 Apr 2015 16:19:52 UTC All use subject to JSTOR Terms and Conditions MARK J. FLANNERY : 275com...

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Section: Other Studies Related To the Efficiency Of Bank Stock Pricesmentioning

confidence: 64%

Using Market Information in Prudential Bank Supervision: A Review of the U.S. Empirical Evidence

Flannery¹

1998

Journal of Money, Credit and Banking

552

261

View full text Add to dashboard Cite

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“…Saunders (1986) suggests that the 1982 Mexican-Brazilian debt crisis may have affected interest rate spreads and loan volumes in the international loan market. Karafiath, Mynatt, and Smith (1991) extend the evidence on international default by showing that investors continued to adjust their expectations following the 1987 Brazilian debt moratorium.…”

Section: Contagionmentioning

confidence: 92%

Contagion Effects from the 1994 Mexican Peso Crisis: Evidence from Chilean Stocks

Mathur¹,

Gleason

Dibooğlu

et al. 2002

The Financial Review

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The contagion, or informational spillover, effects of the 1994 peso crisis from the Mexican market to the Chilean market, and to the Chilean American Depository Receipts (ADRs) trading in the U.S., are examined. Significant excess returns are observed for Chilean stocks for the event dates of the Mexican Peso crisis, providing evidence of contagion effects. Significant excess returns on these Chilean ADRs are also observed for each of the five event dates associated with the Peso crisis, suggesting that the contagion effects spilled over to the ADRs. A multiple regression model shows that the spillover contagion effects were very efficiently transmitted from the Mexican market to the Chilean market to the Chilean ADRs. Multifactor

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“…Docking et al (1997) find negative stock market returns following loan loss announcements of regional banks while they find no negative market reaction to loan loss announcements of money center banks, suggesting that this information is already anticipated by the market. Also notable are the studies of Karafiath et al (1991) or Cooperman et al (1992), who explore the effect of yield spreads for bank debt after failures of other banks and of Akhigbe and Madura (2001), who relate the size of the contagion effect to bank characteristics.…”

Section: Measures Of Systemic Riskmentioning

confidence: 98%