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Put Option Values of Thrifts in the 1980s: Evidence from Thrift Stock Reactions to the FIRREA

Published online by Cambridge University Press:  06 April 2009

Sangkyun Park
Sangkyun Park
Affiliation:
Office of Economic Policy, Office of Management and Budget, Executive Office of the President, 725 17th Street NW, Room 9025, Washington, D.C. 20503, [email protected].
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Abstract

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 limited thrift goodwill that could be counted as regulatory capital. This paper infers the significance of the thrift put option value from the relationship between thrift goodwill and stock returns. The ability to count goodwill as regulatory capital might have resulted in large put option values by allowing many thrifts to hold low capital and risky assets before the legislation. Tightened regulation may have reduced put option values and hence the wealth of thrift shareholders. Goodwill had a large negative effect on stock returns of low capital thrifts in 1989 and the negative effect persisted in the following two years. These findings suggest that many thrifts had large put option values before the FIRREA and the elimination of put option values was largely responsible for the stock price decline.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 37 , Issue 1 , March 2002 , pp. 157 - 176
Copyright
Copyright © School of Business Administration, University of Washington 2002

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