Market Discipline of Subordinated Debt: Empirical Evidence from Japanese Commercial Banks

Young-Soon Hwang, Hong-Ghi Min

Busan Development Institute, Busan, Republic of Korea.
Department of Management Science, Korea Advanced Institute of Science and Technology, Daejeon, Republic of Korea.

DOI: 10.4236/jfrm.2013.22006                

Abstract

We investigate if Subordinated Note and Debenture (SND) holders make banks to take less risk by analyzing balance sheet data of Japanese commercial banks. The cross-section regression shows that banks take less risk as the amount of SNDs increase. Specifically, it is shown that the loan risk measure (the ratio of impaired loans to the total loans) and the stock investment risk measure (the invested stocks over bank capital) have decreased with the increase of SND amounts. These results provide evidence that SNDs are effective instrument for the market discipline.

Keywords

Market Discipline; Subordinated Debt; Japanese Commercial Banks; Loan Risk; Stock Investment Risk

Conflicts of Interest

The authors declare no conflicts of interest.

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