Market Discipline for Financial Institutions and Markets for Information

52 Pages Posted: 16 Jul 2011

See all articles by Apanard Penny Prabha

Apanard Penny Prabha

University of Illinois at Springfield

Clas Wihlborg

Chapman University; University West

Thomas D. Willett

Independent

Date Written: April 15, 2011

Abstract

This study analyzes the causes of the market discipline failure in the recent financial crisis. We argue that the most important market failure of informativeness was that large financial institutions had the incentive to remain opaque strategically so that outside investors could not assess their solvency. We also discuss how different debt-based and equity-based financial instruments provide more or less timely information by illustrating the behavior of different financial instruments (e.g., stock price indexes, credit default swaps and subordinated debt) around events associated with insolvency of some financial institutions during the 2007-2009 financial crisis. Our paper concludes by laying out four “informativeness principles” for regulators and policy makers to follow with the objective to strengthen the incentives of market participants to acquire, analyze, disclose and signal information.

Suggested Citation

Prabha, Apanard Penny and Wihlborg, Clas and Willett, Thomas D., Market Discipline for Financial Institutions and Markets for Information (April 15, 2011). Available at SSRN: https://ssrn.com/abstract=1886485 or http://dx.doi.org/10.2139/ssrn.1886485

Apanard Penny Prabha

University of Illinois at Springfield ( email )

Springfield, IL 62703
United States

Clas Wihlborg (Contact Author)

Chapman University ( email )

333 N. Glassell
Orange, CA 92866
United States
+17147447630 (Phone)

University West ( email )

Trollhättan, 46186
Sweden

Thomas D. Willett

Independent

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