Review of Financial Studies Vol. 31 No. 11 2018

Debt Priority Structure, Market Discipline, and Bank Conduct

Piotr Danisewicz¹; Danny McGowan²; Enrico Onali³; Klaus Schaeck¹

¹ School of Economics, Finance, and Management, University of Bristol · ² Business School, University of Nottingham · ³ Aston Business School, Aston University

Abstract

We examine how debt priority structure affects bank funding costs and soundness. Leveraging an unexplored natural experiment that changes the priority of claims on banks’ assets, we document asymmetric effects that are consistent with changes in monitoring intensity by various creditors depending on whether creditors move up or down the priority ladder. The enactment of depositor preference laws that confer priority on depositors reduces deposit rates but increases nondeposit rates. Importantly, subordinating nondepositor claims reduces bank risk-taking, consistent with market discipline. This insight highlights a role for debt priority structure in the regulatory framework. Received September 1, 2016; editorial decision August 31, 2017 by Editor Philip Strahan.

DOI

10.1093/rfs/hhx111

Volume

31

Issue

11

Pages

4493-4555

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓