Opaqueness of Financial Institutions

Author

Todd G. Griffith, Utah State University

Date of Award

5-2012

Degree Type

Thesis

Degree Name

Master of Science (MS)

Department

Economics and Finance

Committee

Not specified

Abstract

Spectators and professionals have targeted financial institutions as being at the epicenter of recent markets crises The opaqueness of bank holding companies' assets has been assumed to have created additional volatility and inefficiency within the market. It appears that the capital structure of a bank is the actual driving force behind the inefficiency. I conduct multiple empirical analyses to measure whether the lack to financial institutions asset transparency negatively impacts the ability of the firms price to respond to informational innovations in a timely manner. Through additional econometric tests, I explore several economic theories to narrow in on the root cause behind the market inefficiencies created by bank firms. Market efficiency can be measured by characterizing the delay with which prices respond to information. This paper examines price delay which captures the unexpected return premium for stocks trading on Nasdaq and NYSE for the period 1996 through 2008. The results argue that when delay is the measure of market efficiency, banks are relatively less efficient than similarly-sized nonfinancial institutions. The empirical evidence suggests that banks tend to project positive and significant delay coefficients; however, the assets side of the balance sheet does not seem to explain the inefficiency. In contrast, the leverage effect on delay is 75 to 100 times greater for financial institutions relative to similarly matched nonbank firms.

Comments

This work made publicly available electronically on October 30, 2012.

Recommended Citation

Griffith, Todd G., "Opaqueness of Financial Institutions" (2012). All Graduate Plan B and other Reports, Spring 1920 to Spring 2023. 204.
https://digitalcommons.usu.edu/gradreports/204