Market Discipline and the Use of Stock Market Data to Predict Bank Financial Distress

Isabelle Distinguin (1) , Philippe Rous (1) , Amine Tarazi (1)

1 LAPE - Laboratoire d'Analyse et de Prospective Economique

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.

Mots clés: words: Bank; Market Discipline; Bank Risk; Market Prices

Domaines: Sciences de l'Homme et Société; Economies et finances

Isabelle Distinguin, Philippe Rous, Amine Tarazi. Market Discipline and the Use of Stock Market Data to Predict Bank Financial Distress. Journal of Financial Services Research, 2006, 30 (2), pp.151-176. ⟨10.1007/s10693-0016-6⟩. ⟨hal-00794214⟩