| Abstract |
Existing papers on the link between deposit insurance and bank market values have been usually confined to investigate observing incremental regulatory shifts in banking sector. The latest case on the introduction of deposit insurance occurred in China and therefore it gives us a chance to explore the stock market reaction to the major regulatory policy change in banking. The results show the average abnormal returns of all listed banks in China are statistically significant negative on the announcement day. They indicate that investors believe the announcement of deposit insurance has an adverse effect on the banking industry in China. This is consistent with the argument that Chinese government changes their banking policy and allows banks to go bankrupt by establishing the deposit insurance. We find also among the bank characteristics such as assets size, z-score, ROE, and so on, only size has a statistically significant positive impact on the bank abnormal returns on the announcement day. The results signifies that although compulsory deposit insurance enhances certainly the small banks' credibility, China's capital markets think that the adverse influence is less for big banks than for small banks. This seems that markets still expect the too-big-to-fail rescue for larger banks, but no protection for smaller banks. Our results are not consistent with those previously found. It reflects difference in financial regulatory environment prior to the announcement of deposit insurance leads to differential assessment to the same major policy change. |