FIN-01-008

On the Wealth and Risk Effects of the Glass-Steagall Overhaul: Evidence from the Stock Market

January 2001

Lei Yu

ABSTRACT

The replacement of the 1993 Glass-Steagall Act by the Financial Services Modernization Act of 1999 offers a unique opportunity for empirical analysis of the economic arguments concerning product diversification and consolidation within the financial services industry. This paper analyses the stock price response of firms in the banking, securities, and insurance industries to examine the wealth and risk effects of this deregulation. We find an increase in the collective market value of financial services firms, while the magnitude of the wealth effects differ across industries and size groups. Large securities firms, large insurance companies, and bank holding companies (BHCs) with pre-existing subsidiaries operating in the securities business (section 20 subsidiaries), experienced significant increases in the market value. This reflects market anticipation of gains from product diversification possibly arising from cross-product synergies and the potential extension of "too big to fail" guarantees for the largest financial services firms. We also find that the market accurately predicted the type of BHCs that would engage in product expansion after the repeal.


Classification: G21; G28

Lei Yu
Institution: Leonard N. Stern School of Business, New York University
Telephone: (212) 998-0327
Fax: 212-995-4233
Email: lyu@stern.nyu.edu


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