Doctoral Dissertations

Beom Joon Yu

Date of Award

5-1991

Degree Type

Dissertation

Degree Name

Doctor of Philosophy

Major

Business Administration

Major Professor

George C. Philippatos

Committee Members

David C. Ketcham, Sidney L. Carroll, Harold A. Black

Abstract

This study examines the impact of the DIDMCA on the return and risk responses of banks and savings. For this purpose, average, individual and portfolio abnormal returns are measured for different groups of banks and savings and loans in terms of FRS-membership, NOW account experience, types of BHCs, firm size, and state laws, individually and collectively. In addition, this study analyzes the cross-sectional relation between individual abnormal returns and information-based firm-specific characteristics. To correct for improper identification of structural and legislative backgrounds, and methodological problems in three recent studies in this area, this study has identified in a systematic way seventeen events, with different bills passed and announcements made by the court. Congress, and the government, leading up to the passage of the DIDMCA. The empirical tests employ two alternate frameworks of the unrestricted MVRM and the restricted MVRM. The MVRMs deal with full covariance of multivariate data of individual daily stock returns to overcome the cross-sectional correlation problem between stock returns. The empirical findings of the return responses to the passage of the DIDMCA can be summarized as follows: first, the return responses to the passage of the DIDMCA became more significant as the uncertainty regarding the final form and contents of the legislation was resolved over time. The return responses differed across different groups and within the same group of banks and savings and loans. Even FRS-member banks did not react in a similar way to the FRS-membership issue. Second, the effects of wealth redistribution and the market adjustment process are found within the banking industry for the last event when President Carter signed the bill. This result supports Stigler's wealth transfer hypothesis. Third, banks and savings and loans in this study did not show any significant return responses to several important events regarding the authorization of interest-bearing checking accounts and the removal of Regulation Q. Fourth, large-sized and/or medium-sized banks gained but small-sized banks lost from the last announcement. In particular, small banks appeared to produce earlier and negative abnormal returns to the passage of the DIDMCA. Fifth, under the different state laws, shareholders perceived the geographic diversification benefits through statewide branch banking rather than MBHC operations. Using intervention analysis, an examination of the market equilibrium process in risk responses revealed significant reductions in systematic risk of all subgroups of banks, regardless of firm size, types of banks, NOW experience, or state laws. However, it is found that the DIDMCA failed to reduce the risk of savings and loans. Therefore, this result rejects Peltzman's risk-reduction hypothesis and is also inconsistent with the results in the previous studies. The cross-sectional analysis provides evidence that the associations between abnormal returns and information-based firm-specific characteristics do differ across different subgroups of banks and different events within the same subgroup. However, there exists at least some stationarity in those differences. Of all variables examined, the size and total deposit variables are the most powerful in explaining the variation in abnormal return behavior. Summarizing the return and risk responses of different subgroups of banks and savings and loans, it is important to note that it is important to note that this study is basically inconsistent with the previous studies in terms of problem identification, methodology, data, and empirical implications.

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