MARKET REACTION TO THE THRIFT BAILOUT

This paper examines the share price reaction of depository institution s 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 confidenc e, reduced risk premiums on deposits, reduced agency costs, or reduced loan losses, among other reasons. However, the effects of FIRREA on c ommercial banks were negligible. An intra-industry analysis revealed t hat the variation in share price responses could not be explained by c ross-sectional differences in thrift capital levels.