Date of Award
Doctor of Philosophy
The dissertation incorporates four separate essays addressing the economics of financial distress. While essays one and two examine the capital market reaction to security rating changes and bank failures, the last two offer methods for deposit insurance corporations to better handle distress among member financial institutions.;The first essay measures the impact of rating changes on equity returns. Pooled cross-section time series analysis allows testing of significance of changes in systematic risk as well as price. Tests of monthly and daily data indicated that there are no shifts in the systematic risk of firms experiencing rating changes after controlling for the effects of contemporaneous events. On average, a one-time drop in share price is observed for rating reductions, while no significant reaction is found for rating increases.;The second essay uses pooled cross-section time series analysis to investigate the capital market reaction to the failure of three Ontario trust companies, the bailout of the Canadian Commercial Bank (CCB) and subsequent runs on deposits. Even though the trust companies' collapse was triggered by problems isolated to the troubled institutions, the prices of the non-failed trust companies' shares fell. The prices of the non-failed Schedule "A" chartered banks also fell upon announcement of the CCB bailout. However, news of runs on deposits at other banks only affected the price of common stocks of small banks with low security ratings.;The third essay presents several important extensions to previous option pricing models of deposit insurance premiums and applies them to the credit unions of British Columbia. The analysis suggests that variable rate premiums can be determined for financial institutions without publicly traded equity and also to measure the exposure of lenders-of-last-resort such as the Canada Deposit Insurance Corporation.;The fourth essay examines the criteria that underlie the choice of action by a deposit insurance corporation in handling distressed member financial institutions. Incorporating these criteria, an early warning system that predicts not only the likelihood of financial distress but also the type of financial assistance required is developed.
Smith, Brian Frederick, "Four Essays On The Economics Of Financial Distress: Bond Ratings, Bank Failures And Deposit Insurance" (1987). Digitized Theses. 1638.