The US economy experienced major regulatory changes in the banking and finance industry with the passage of five major acts over the period 1980 to 1991. This has generated an extensive literature investigating the effects of these changes on the US banking industry. In particular, this body of research has examined the share market reaction to regulatory changes, as well as their impact on the risk, return, market value and profitability of banking industry stocks. Generally, it has been found that the regulatory changes have had a substantial impact, although the effect has not been uniform across all depository institutions. This paper extends this literature by analysing the stability of a sample of eighteen US banking industry stock betas across five periods: a pre-regulatory change period, a monetary experiment period, a deregulation period, a reregulation period and a post-regulatory change period. Based on an analysis of weekly returns, we find that the level of bank risk has increased. Further, we also find a tendency towards greater beta instability in both the monetary experiment and deregulation samples. The degree of beta instability is lowest in the pre-regulatory change and post-regulatory change samples. Overall the monetary experiment and regulatory change coincided with an increased tendency towards beta instability. We also compare our results to a randomly selected control sample of non-banks and find some more general effects of regulatory change on individual stock betas.

This study investigates the aggregate stock market impact of sovereign rating changes. Consistent with evidence pertaining to company credit rating changes, we report that rating downgrades have a negative wealth impact on market returns. Moreover, we find that a downgrade impacts negatively on both the domestic stock market and the dollar value of the country’s currency. Interestingly, of the four credit rating agencies examined, only Standard & Poors and Fitch rating downgrades result in significant market falls. Finally, we can find no evidence that emerging markets are particularly sensitive to rating changes or that markets react more severely to multiple rating changes.

This paper extends our knowledge of corporate debt maturity structure by examining whether and to what extent overconfident CEOs affect maturity decisions. Consistent with a demand side story, we find that firms with overconfident CEOs tend to adopt a shorter debt maturity structure by using a higher proportion of short-term debt (due within 12months). This behavior of overconfident CEOs is not deterred by the high liquidity risk associated with such a financing strategy. Our demand side explanation remains robust even after considering six possible alternative drivers including a competing supply side explanation (in which creditors are reluctant to extend long-term debt to overconfident CEOs).

We examine whether connected hedge funds (i.e. those that are prime-brokerage clients of bailout banks) benefited from bailout programs initiated in seven countries during the 2007–2009 financial crisis. We find that being connected to a bailout bank is generally beneficial for hedge funds in that it lowers the rate of fund failure. However, this benefit becomes smaller during the post bailout period, for example, due to the greater risk-taking and higher leverage of such funds subsequent to bailouts. As such, our findings provide support for the moral hazard hypothesis.