The wealth effects from a subordinated debt policy: evidence from passage of the Gramm–Leach–Bliley Act Andrew H. Chen a, * , Kenneth J. Robinson b,1 , Thomas F. Siems b,1 a Edwin L. Cox School of Business, Southern Methodist University, P.O. Box 750333, 6212 Bishop Boulevard, Dallas, TX 75275-0333, USA b Federal Reserve Bank of Dallas, Dallas, TX, USA Received 1 August 2002; received in revised form 1 October 2002; accepted 1 February 2003 Abstract Using an event study methodology which assumes that returns follow a GARCH (1,1) process, we estimate the wealth effects of a possible subordinated debt policy by examining the stock market reaction to the passage of the Gramm–Leach–Bliley (GLB) Act. A portfolio of banks with relatively high amounts of subordinated debt experienced positive and significant wealth effects associated with passage of the GLB. Portfolios made up of all banks, and those with no subordinated debt experience statistically insignificant wealth effects. We argue that these results suggest that policymakers should consider the use of subordinated debt as a way to enhance market discipline on banks. D 2003 Elsevier Inc. All rights reserved. JEL classification: G14; G21; G28 Keywords: Subordinated debt; GLB Act; Event study; Market discipline; GARCH 1. Introduction In November 1999, Congress passed the Gramm–Leach–Bliley (GLB) Act, one of the most important pieces of banking legislation since the Great Depression. In addition to eliminating Glass– Steagall restrictions on commercial banks’ affiliations with securities firms, the act also authorized 1058-3300/$ - see front matter D 2003 Elsevier Inc. All rights reserved. doi:10.1016/S1058-3300(03)00025-9 * Corresponding author. Tel.: +1-214-768-3179; fax: +1-214-768-4099. E-mail address: achen@mail.cox.smu.edu (A.H. Chen). 1 The views expressed are those of the authors and should not necessarily be attributed to the Federal Reserve Bank of Dallas, or the Federal Reserve System. www.elsevier.com/locate/econbase Review of Financial Economics 13 (2004) 103–119