Additional evidence on the information-based contagion effects of bank failures |
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| Institution: | 1. Faculty of Management, Tel Aviv University, Tel Aviv, Israel;2. The Hong Kong University of Science and Technology, Department of Accounting, School of Business and Management, Clear Water Bay, Kowloon, Hong Kong;3. Faculty of Management, Tel Aviv University, Tel Aviv, Israel;1. Adnan Kassar School of Business, Lebanese American University, Beirut, Lebanon;2. School of Finance and Economics, Jiangsu University, Zhenjiang, 212013, China;3. Department of Management Studies, Bahria University, Islamabad, Pakistan;4. Universidade de Lisboa, ISEG – Lisbon School of Economics and Management, SOCIUS / CSG – Research Centre in Economic and Organisational Sociology / Research in Social Sciences and Management, Rua Miguel Lupi, 20, Lisbon 1249-078, Portugal;5. Institute of Business Research, University of Economics Ho Chi Minh City, Vietnam (UEH);6. Institute of Business Research and CFVG, University of Economics Ho Chi Minh City, Ho Chi Minh City, Vietnam;1. Economics and Finance, School of Business, Western Sydney University, Locked Bag 1797, Penrith, NSW 2751, Australia;2. The University of Sydney, Business School, Australia;3. School of Business, Western Sydney University, Locked Bag 1797, Penrith, NSW 2751, Australia;4. Tonmoy Choudhury, School of Business and Law, Edith Cowan University, Australia;1. Harvard University, United States;2. NBER, United States;3. Toulouse School of Economics, France;4. HEC Paris, France;5. CEPR, UK;1. Ancell School of Business, Western Connecticut State University, 181 White St., Danbury, CT 06810, USA;2. College of Business and Technology, Northeastern Illinois University, 5500 N. St Louis Ave, Chicago, IL 60623, USA;1. University of Exeter, United Kingdom;2. University of Haifa, Israel |
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| Abstract: | Recent theoretical models addressed the question of the nature of bank runs and what triggers them. Two competing hypotheses emerged: pure panic and information-based contagion. This study provides additional evidence consistent with the latter hypothesis. Three observable bank characteristics are examined as proxy measures for the interim private information used by rational depositors in assessing the riskiness of a bank's long-lived assets that may trigger bank runs. The three factors are (1) the distance of the solvent banks' headquarters from the headquarters of each failed bank; (2) the size of the solvent banks; and (3) the capital ratio as a proxy for their solvency. The analysis is conducted in the context of the five large bank failures that occurred in the Southwest region of the US during the mid-1980s. Weekly abnormal returns of 33 Southwestern BHCs, in ten critical failure-related event dates are regressed on the three observable bank characteristics. Our findings suggest that distance and capital adequacy are negatively related to the magnitude of the contagion effect, whereas size is positively related. |
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