INSIDERS ASSESSMENTS OF THE STOCK MARKETS PRICING OF NEW-ENGLAND BANKSTOCKS

The surge in bank failures in the late 1980s and early 1990s prompted many policy proposals in search of an improved regulatory and supervis ory framework. One such reform urges the enhancement of market forces in the disciplining of banking institutions. This study assesses the e ffectiveness of one type of outside monitor, stock market participants , in identifying New England banks' exposure to the region's real esta te market in the late 1980s and early 1990s. An examination of this is sue is important for evaluating the potential role that private sector claim-holders can exercise in the monitoring and disciplining of bank s. Were shareholder reactions to the troubled real estate market consi stent with individual banks' exposures to this market, or was there ev idence of bank share prices deviating from their fundamentals? The ana lysis relies on trading by bank managers, who are likely the best info rmed regarding the bank's risk exposure, to assess the market's accura cy in pricing bank stocks. By examining managerial trading around chan ges in the market's valuation of a bank, one can gain insight into the insiders' assessment of the market's pricing of their firms' shares. Trading activity by managers of surviving institutions suggests that t he market had difficulty assessing a bank's exposure to the region's b usiness cycle. The evidence supports the assertion that informational asymmetries are present in the banking industry. Given this environmen t, requiring bank managers to disclose more of their private informati on could improve the market's ability to discipline banks.