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What's the value of a TBTF guranty? Evidence from the G-SII designation for insurance companies

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posted on 2023-08-05, 11:13 authored by Kathryn Dewenter, Leigh A. Riddick

We document average abnormal stock returns of 14% for international insurance firms designated as Global Systemically Important Insurers (G-SII). These gains are associated with a fall in average default probability of 15.6%, and statistically weak and economically marginal increases in expected asset risk. Over the same event window, identical measures for other large insurance firms show no significant changes in equity returns or implied asset risk, but an increase in default probability of 27%. These results suggest that G-SII investors still perceive a net gain from TBTF protection, despite new compliance requirements and costs. Our evidence also suggests that these gains are driven primarily from reductions in default probability, as results are consistent with investor expectations that the new regulatory regime will limit moral hazard effects from the guaranty.

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Journal of Banking and Finance

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This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.

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http://hdl.handle.net/1961/auislandora:77986

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