Staff Reports
On the Market Discipline of Informationally Opaque Firms: Evidence from Bank Borrowers in the Federal Funds Market
August 2006 Number 257
JEL classification: G14, G18, G21

Author: Adam Ashcraft and Hoyt Bleakley

Using plausibly exogenous variation in demand for federal funds created by daily shocks to reserve balances, we identify the supply curve facing a bank borrower in the interbank market and study how access to overnight credit is affected by changes in public and private measures of borrower creditworthiness. Although there is evidence that lenders respond to adverse changes in public information about credit quality by restricting access to the market in a fashion consistent with market discipline, there is also evidence that borrowers respond to adverse changes in private information about credit quality by increasing leverage so as to offset the future impact on earnings. While the responsiveness of investors to public information is comforting, we document evidence that suggests that banks are able to manage the real information content of these disclosures. In particular, public measures of loan portfolio performance have information about future loan charge-offs, but only in quarters when the bank is examined by supervisors. However, the loan supply curve is not any more sensitive to public disclosures about nonperforming loans in an exam quarter, suggesting that investors are unaware of this information management.

Available only in PDFPDF62 pages / 402 kb
tools
By continuing to use our site, you agree to our Terms of Use and Privacy Statement. You can learn more about how we use cookies by reviewing our Privacy Statement.   Close