Stock Market Reaction to the Bank Liquidation in Japan: A Case for the Informational Effect Hypothesis

Previous studies investigating the stock market reaction to U.S. bank failures rejected the bank run or domino hypothesis. However, if providing relevant bank information to the public is crucial to preventing bank panics, Japanese banks with limited disclosure are more vulnerable to bank runs than their U.S. counterparts. In this paper, I investigate the stock market reaction to Hyogo Bank's liquidation on August 30, 1995, which was the first bank liquidation in Japan and placed the financial burden on the general public. I find that stock market participants distinguished solvent banks from problematic banks. That is, my results, supporting the informational effect hypothesis, suggest that it is questionable even in Japan for the government to bail out an insolvent bank based on the potential risk of bank runs.