TY - JOUR
T1 - Reactions of equity markets to recent financial reforms
AU - Sorokina, Nonna
AU - Thornton, John H.
N1 - Funding Information:
The Dodd-Frank Act , at more than 2000 pages, contains a large number of provisions to correct many perceived problems with the financial system. Some of the more important provisions include: • Consumer Protection: Creates the Consume Financial Protection Bureau and centralizes responsibility for consumer protection within this single entity. The new entity is very independent as compared to most government agencies. It is led by an independent director, functioning on with an independent budget paid by the Federal Reserve. The bureau consolidates functions previously performed my several regulatory bodies. It will include an Office of Financial Literacy and a consumer complaint hotline. • Too Big to Fail: The Act limits the formation and functioning of the institutions that may pose systemic risk. It restricts proprietary trading by banks and non- banking institutions supervised by Federal Reserve. These institutions are also prohibited from investing in hedge funds and private equity funds. It extends the right of Federal Reserve to control non-bank institutions that may pose an economy-wide risk. It promotes uniform risk-management rules for systemically important institutions; and, requires them to create comprehensive exit strategies. It sets up orderly liquidation procedures and tightens requirements for the FDIC guarantee release. The Act prohibits bailouts at the taxpayers’ expense and specifies that costs should be borne by the industry. • Systematic Risk: The Act creates the Financial Stability Oversight Council, consisting of 10 federal financial regulators, an independent member, and 5 non- voting members. The council is expected to identify systemic risks at the early stage and respond to the threat. It will make recommendations to Federal Reserve on the financial standards to limit the formation of Too Big to Fail institutions; and, authorize the Federal Reserve to regulate non-bank financial companies. The Council will be supported by a new Office of Financial Research. • Regulation of Derivatives: The Act calls for SEC and CFTC regulation of over- the-counter derivatives; establishes central clearing and exchange trading of certain derivatives. It requires significant disclosures, increases standards of conduct and establish financial safeguards for participants in the derivatives markets. • Mortgage Lending: The Act reforms the mortgage market. It requires lenders to ensure borrower's sustainability, controls fairness of the lending practices, establishes non-compliance penalties for the lenders and brokers; and, creates the Office of Housing Counseling as a part of HUD. • Corporate governance: Gives shareholders rights to participate in director- nominating and pay-related issues. It eliminate compensation-targeted business strategies and reporting manipulation, tightens control over the compensation in financial industry, and establishes SEC review of the compensation tied to stock performance. • Credit Ratings: The Act creates an Office of Credit Ratings at the SEC. It requires methodology disclosure and independent information collection so as to prevent conflicts of interest. It requires rating analyst's to pass a qualification exam; and, requires credit rating agencies to carry liability for non-diligent rating process. • Regulatory Agencies: The Act reforms the Federal Reserve system; improves bank and thrift regulation by closing the Office of Thrift Supervision; and creates the Federal Insurance Office. I increases the funding of the SEC and increases its scale and scope of control.
Publisher Copyright:
© 2016 Elsevier Inc.
PY - 2016/9/1
Y1 - 2016/9/1
N2 - We conduct event studies of broad equity market reaction to the events surrounding introduction and enactment of recent financial reform initiatives. In response to the introduction of the Dodd-Frank Act, financial firms and firms from a few other industries experience a statistically significant decrease in systematic risk, while a substantial number of industries, representing a broad cross-section of the economy, experiences a statistically significant increase in systematic risk. The systematic risk in some industries does not change. The increase in risk is concentrated in industries in which firms are dependent on external capital. The initial market reaction to Dodd-Frank indicates that it may lower the risk in financial firms, but the risk for many non-financial firms simultaneously increases.
AB - We conduct event studies of broad equity market reaction to the events surrounding introduction and enactment of recent financial reform initiatives. In response to the introduction of the Dodd-Frank Act, financial firms and firms from a few other industries experience a statistically significant decrease in systematic risk, while a substantial number of industries, representing a broad cross-section of the economy, experiences a statistically significant increase in systematic risk. The systematic risk in some industries does not change. The increase in risk is concentrated in industries in which firms are dependent on external capital. The initial market reaction to Dodd-Frank indicates that it may lower the risk in financial firms, but the risk for many non-financial firms simultaneously increases.
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U2 - 10.1016/j.jeconbus.2016.05.001
DO - 10.1016/j.jeconbus.2016.05.001
M3 - Article
AN - SCOPUS:84973922743
SN - 0148-6195
VL - 87
SP - 50
EP - 69
JO - Journal of Economics and Business
JF - Journal of Economics and Business
ER -