Abstract
This paper examines the share price reaction of depository institutions to the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) passed August 1989. We find a favorable share price response for thrifts, which could be attributed to enhanced depositor confidence, reduced risk premiums on deposits, reduced agency costs, or reduced loan losses, among other reasons. However, the effects of FIRREA on commercial banks were negligible. An intra-industry analysis revealed that the variation in share price responses could not be explained by cross-sectional differences in thrift capital levels.
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