Further Evidence on the Information Content of Bank Examination Ratings: A Study of BHC-to-FHC Conversion Applications

Certain nonrecurring circumstances associated with the passage of the Gramm Leach Bliley (GLB) Act create a unique opportunity for the market to infer bank examination ratings. This natural experiment enables an assessment of the market's views on this, heretofore, private information. We find little evidence that the stock market extracted and/or valued regulatory information from these conversion announcements. Upon implementation of the GLB Act, systematic risk increased for most of our sample—both converting and non-converting BHCs. We find smaller bond spreads for converting BHCs compared to non-converters. While the expanded bank powers from the GLB Act increases systematic risk exposure to shareholders, bondholder exposure to credit-risk appears to decrease.