Capital Markets' Assessment of the Economic Impact of the Dodd-Frank Act on Systemically Important Financial Firms



Date of this version


Document Type



The Dodd–Frank Act, The too-big-to-fail policy, Stock market, Bond mark


We examine stock and bond market reactions to the key events leading to the passage of the Dodd–Frank Act to assess the markets’ expectations about the effectiveness of the Act on systemically important financial firms. Using small/medium sized domestic financial institutions as a control group, we find that large financial institutions overall had negative abnormal stock returns and positive abnormal bond returns, suggesting that the markets expect the Act to be effective in reducing these banks’ risk-taking. We further investigate the market reactions for (1) larger and more interconnected financial institutions; and (2) the Big 6 banks to evaluate the markets’ assessment about the effectiveness of the act in ending the too-big-to-fail policy. We document that larger and more interconnected financial institutions experienced more negative abnormal stock returns and more positive abnormal bond returns as compared to other banks in our sample, but these relations are not present during the final phase of the passage. Likewise, we find that both shareholders and bondholders of the Big 6 banks initially experienced significant negative returns, followed by insignificant returns during the final phase of the passage. These results appear to suggest the markets are doubtful about the effectiveness of the final version of the bill to end the too-big-to-fail status in particular for the Big 6 banks.

Published in

Journal of Banking and Finance

Citation/Other Information

We would like to thank Anne Beatty, Mo Khan (discussant of 2012 FARS Midyear Meeting), Yuri Loktionov (discussant of 2012 FEA conference), René Stulz, Maria Vulcheva, Chris Williams, Andrew Winton, and workshop participants at Chinese University of Hong Kong, Rice University, Southern Methodist University, University of Georgia, University of Minnesota, University of Toronto, the 2012 FARS Midyear Meeting, and the 2012 FEA conference for helpful comments. Part of the paper was done when the first author was at the University of Minnesota. We appreciate generous research support from our respective schools and the fund from Canadian Social Sciences and Humanities Research Council.