Bank accounting disclosure, information content in stock prices, and stock crash risk

Abstract

Purpose This paper aims to examine how banks’ accounting disclosure policies affect information content in stock prices and stock crash risk. Design/methodology/approach This paper uses 1996-2013 as the sample period. The final sample includes 10,045 observations in 37 countries. This paper uses stock return synchronicity to measure information content in stock prices. This study uses the frequency difference between extremely negative and positive stock returns to measure stock crash risk. To measure the level of bank accounting disclosure, this research follows Nier and Baumann (2006) to construct an aggregate disclosure index based on inclusions and omissions of a series of items in a bank’s annual accounting reports. Findings This paper finds that banks’ stocks have lower stock return synchronicity and fewer extremely negative returns if banks have higher levels of financial statement disclosure. These results suggest that banks’ stocks have higher information content and lower crash risk if banks’ information environment is more transparent. Originality/value Overall, this paper provides new insight about how to increase banks’ transparency and the safety of the banking industry, which is beneficial to economic growth. To increase banks’ transparency and reduce the possibility of extremely negative stock returns, one way to regulate banks is to increase their accounting disclosure. In addition, the extant literature (Chen et al., 2006, Durnev et al., 2003, 2004; Wurgler, 2000) demonstrates that firms with lower stock return synchronicity have more transparent information environments and higher investment efficiency. Thus, this paper finds that higher levels of bank accounting disclosure are associated with lower stock return synchronicity, which further reduces banks’ opacity and increases banks’ investment efficiency. Finally, compared to business firms, stock crash risk has much direr consequences because one bank’s stock crash will affect overall financial stability. Thus, it is important for authorities to know the effects of accounting disclosure on bank stock crash risk.

A review of accounting research in Australasia

“…Financial Reporting covers preparer perspectives on the choices and methods concerning the preparation of financial statements. Studies within this category primarily focused on accounting standards (Tsunogaya et al ., ), accounting conservatism (Salama and Putnam, ), and accounting disclosures (Du et al ., ). For example, Cohen and Karatzimas () assessed changes in accounting information quality following a transition from cash accounting to a modified‐cash accounting basis.…”

Bank stocks inform higher growth—A System GMM analysis of ten emerging markets in Asia

“…The information role of markets is different and is considered thru the movements of the market index (Rm). The information role of specific bank stock portfolios (Du, Song and Wu, 2016;Blau, Brough and Griffith, 2017;Chen and Vashishtha, 2017) also depends of legal and accounting structure (Cole, Moshirian and Wu, 2008) and we expect the relationship to be positively increasing with increase in transparency, regulation and better overall corporate governance environment. The relation found in Cole, Moshirian and Wu (2008) was significant for both market indices and bank stock portfolios.…”

The Quality of Financial Information Disclosures and its Contribution to Financial Stability of Commercial Banks in Kenya

“…In order to improve the asset quality, the financial information about the banks' clients should be screened on their ability to meet the obligation of principal and interest to reduce the failure of commercial banks (Mamatzakis, Zhang, & Hu, 2017). This study focuses on banking sector since banks act as financial intermediaries, performing important functions of allocating resources and deals with complex financial instruments which are greatly affected by deficiencies of financial information from its clients (Du, Song, & Wu, 2016). More importantly, after the global financial crises of the year 2007/2008, there was an increased need for having financial information disclosures in banking sector for accounting transparency and mitigating banks' failures (Boateng, 2016;Haddad & Alali, 2021;Bischof, Laux, & Leuz, 2021).…”

“…The banks may fail to provide adequate financial disclosures if the management judge it to be negatively affecting its financial performance (Du, Song, & Wu, 2016). Such withholding of information can only be for a short period of time and when such negative information accumulates the banks may disclose the information suddenly which can adversely affect the bank causing contagion among the banks making financial sector unstable (Haddad & Alali, 2021;Bischof, Laux, & Leuz, 2021).…”