NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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Do Distressed Banks Really Gamble for Resurrection?

Itzhak Ben-David, Ajay A. Palvia, René M. Stulz

NBER Working Paper No. 25794
Issued in May 2019
NBER Program(s):Corporate Finance Program

We explore the actions of financially distressed banks in two distinct periods that include financial crises (1985-1994, 2005-2014) and differ in bank regulations, especially concerning capital requirements and enforcement. In contrast to the widespread belief that distressed banks gamble for resurrection, we document that distressed banks take actions to reduce leverage and risk, such as reducing asset and loan growth, issuing equity, decreasing dividends, and lowering deposit rates. Despite large differences in regulation between periods, the extent of deleveraging is similar, suggesting that economic forces beyond formal regulations incentivize bank managers to deleverage when their banks are in distress.

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Document Object Identifier (DOI): 10.3386/w25794

 
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