Banks' Financial Reporting Frequency and Asset Quality

Abstract

We examine the effects of banks' financial reporting frequency from 2000 to 2014 and find that quarterly reporting improves their loan portfolio quality. Sample banks experience a relative decrease of about 11 percent in their nonperforming loans after switching to quarterly financial disclosures. Consistent with market discipline enhancing lending practices, these results are stronger in regimes with weaker depositor insurance and external monitoring, and in those with stronger capital markets. We also find that banks that provide quarterly financial information experience lower deposit interest rates and credit default swap spreads. Collectively, our findings suggest that quarterly reporting reduces banks' risk-taking. JEL Classifications: G21; G28; G32; M41; M48.

The Role of Gatekeepers in Capital Markets

“…In contrast to the possibly dysfunctional effects of mandated disclosures, other studies have pointed to beneficial real effects (Fu, Kraft, and Zhang [], Cho [], Dyreng, Hoopes, and Wilde [], Christensen et al. [], Balakrishnan and Ertan [], Rauter []) . Chen [] contributes to the “real effects” literature by examining the impact of mandated disclosures on acquisitions.…”

Financial Reporting Frequency and Corporate Innovation

“…Research on the frequency of financial reporting largely focuses on its effects on firms' information environments, such as the information content of annual reports (McNichols and Manegold 1983), earnings timeliness (Alford et al 1993;Butler, Kraft, and Weiss 2007), and the cost of equity (Fu, Kraft, and Zhang 2012;Verdi 2012). Recent studies begin to examine the effects of frequent financial reporting on managerial decisions, such as investments in fixed assets (Nallareddy, Pozen and Rajgopal 2017;Kraft, Vashishtha and Venkatachalam 2018;Kajüter, Klassmann, and Nienhaus 2019), real activities manipulations (Ernstberger et al 2017), cash holdings (Downar, Ernstberger and Link 2018), and banks' loan portfolio quality (Balakrishnan and Ertan 2018). Given the mixed evidence in the literature, Roychowdhury, Shroff, and Verdi (2019) conclude that whether an increase in reporting frequency decreases managers' investment horizon and induces myopia, or whether it increases transparency and serves a disciplinary role remains an open question.…”

The role of banking supervision in credit risk disclosures and loan loss provisions

“…The literature has investigated the incremental value of additional information as a way to increase transparency and to reduce information asymmetries, not to mention as a tool for market discipline (Ahmed, Kilic, & Lobo, 2006;Balakrishnan & Ertan, 2018;Bischof, 2009). This strand of literature is even more relevant for the banking industry as the financial crisis of 2007-2008 is usually associated with its opacity because several banks took on excessive risks that were not properly disclosed (Goldstein & Sapra, 2013).…”

“…The literature provides evidence of the benefits of additional information to the quality of financial reporting because of less information asymmetry and greater market discipline (Ahmed et al, 2006;Balakrishnan & Ertan, 2018;Bischof, 2009). Nevertheless, with regard to banks' stress test results, Goldstein and Sapra (2013) suggest that there are potential endogenous costs associated with such disclosure as it can induce suboptimal behaviour in banks.…”