This study examines the consequences of failures involving publicly held S&Ls on the market value of surviving firms in the industry. Market reactions of surviving firms are predicted to be associated with the circumstances surrounding the failure as well as the characteristics of the surviving S&Ls. Four competing (but not mutually exclusive) hypotheses are examined.
An overall positive intra-industry market reaction was observed for the failures of eight publicly traded S&Ls during 1985 and 1986; however, this reaction was not significant at conventional levels. Cross-sectional analyses of the relation between market reactions and characteristics of failed and surviving S&Ls provides some support for the hypothesis that positive reactions were associated with a perceived reduction in competition, especially for stronger surviving S&Ls. The three remaining hypotheses (related to regulatory enforcement, regulatory resources, and the contagious effects of individual failures) receive only weak support.
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