Abstract
We assess the extent to which stock market information can be used to estimate leading indicators of bank financial distress. We specify a logit early warning model, designed for European banks, which tests if market based indicators add predictive value to models relying on accounting data. We also study the robustness of the link between market information and financial downgrading in the light of the safety net and asymmetric information hypotheses. Some of our results support the use of market-related indicators. Other results show that the accuracy of the predictive power depends on the extent to which bank liabilities are market traded.
This is a preview of subscription content, log in via an institution to check access.
Similar content being viewed by others
References
Bank for International Settlements (2003) Overview of the new basel capital accord. Consultative Document April
Berger AN, Davies SM, Flannery MJ (2000) Comparing market and supervisory assessments of bank performance: who knows what when? J Money, Credit Bank 32(3):641–667
Billett MT, Garfinkel JA, ONeal ES (1998) The cost of market versus regulatory discipline in banking. J Financ Econ 48:333–358
Black F, Scholes M (1973) The pricing of options and corporate liabilities. J Polit Econ 81:637–654
Crouzille C, Lepetit L, Tarazi A (2004) Bank stock volatility, news and asymmetric information in banking: an empirical investigation. J Multinatl Financ Manag 14:443–461
Curry TJ, Elmer PJ, Fissel GS (2003) Using market information to help identify distressed institutions: a regulatory perspective. FDIC Bank Rev 15(3):116
Diamond DW (1984) Financial intermediation and delegated monitoring. Rev Econ Stud 51(3):393–414
Diamond DW, Dybvig PH (1983) Bank runs, deposit insurance and liquidity. J Polit Econ 91:401–419
Flannery MJ (1998) Using market information in prudential bank supervision: a review of the U.S. empirical evidence. J Money, Credit Bank 30(3):273–305
Flannery MJ (2001) The faces of market discipline. J Financ Serv Res 19(2/3):107–119
Goyeau D, Sauviat A, Tarazi A (1998) Taille, rentabilité et risque bancaire, évaluation empirique et perspectives pour la réglementation prudentielle. Revue d Economie Politique 108(3):339–361
Goyeau D, Sauviat A, Tarazi A (2001) Marché financier et évaluation du risque bancaire. Les agences de notation contribuent-elles à améliorer la discipline de marché? Revue Economique 52, mars:265–283
Gropp R, Vesala J, Vulpes G (2006) Equity and bond market signals as leading indicators of bank fragility. J Money, Credit Bank 38(2):399–428
Leland HE, Pyle DH (1977) Informational asymmetries, financial structure, and financial intermediation. J Finance 32:371–387
Merton RC (1977) On the pricing of contingent claims and the Modigliani–Miller theorem. J Financ Econ 5:241–249
Author information
Authors and Affiliations
Corresponding author
Rights and permissions
About this article
Cite this article
Distinguin, I., Rous, P. & Tarazi, A. Market Discipline and the Use of Stock Market Data to Predict Bank Financial Distress. J Finan Serv Res 30, 151–176 (2006). https://doi.org/10.1007/s10693-0016-6
Received:
Revised:
Accepted:
Published:
Issue Date:
DOI: https://doi.org/10.1007/s10693-0016-6