Why Did Thrift Goodwill Matter in 1989? - FEDERAL RESERVE BANK of NEW YORK

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Staff Reports

Why Did Thrift Goodwill Matter in 1989?

November 1998 Number 51

JEL classification: G21, G32

Author: Sangkyun Park

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 limits thrift goodwill that can be counted as regulatory capital. This paper examines if and why the goodwill clause adversely affected the market value of thrifts. The main findings are that goodwill had a large negative effect on the stock returns of low-capital thrifts in 1989 and that the negative effect persisted in the following two years. These findings suggest that a reduced put option value accounted for a large portion of the stock-price decline. The role of asymmetric information appears to have been small.

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34 pages / 63 kb

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