Title

Charter Value, Tobin's Q and Bank Risk During the Subprime Financial Crisis

Abstract

Charter value is important in the banking industry because of its ability to reduce the moral hazard incentives that result from government-provided deposit insurance. Previous research suggests that geographic deregulation in the 1970s and 1980s increased competition and eroded charter values. Yet, a common proxy for charter value, Tobin's Q, increased significantly in the 1990s and beyond even as bank deregulation continued. We show that Tobin's Q is a poor cardinal measure of charter value though it still has merit as an ordinal measure. Our findings suggest that charter value has been declining through time, contributing to the increase in risk-taking that led to the subprime financial crisis.

Department(s)

Finance and General Business

Document Type

Article

DOI

https://doi.org/10.1016/j.jeconbus.20https://doi.org/10.https://doi.org/10.003

Keywords

Charter value, Tobin's Q, core deposits, bank holding companies, subprime financial crisis

Publication Date

2011

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