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Debtholder Monitoring Incentives and Bank Earnings Opacity
Published online by Cambridge University Press: 09 October 2020
Abstract
We exploit exogenous legislative changes that alter the priority structure of different classes of debt to study how debtholder monitoring incentives affect bank earnings opacity. We present novel evidence that exposing nondepositors to greater losses in bankruptcy reduces earnings opacity, especially for banks with larger shares of nondeposit funding, listed banks, and independent banks. The reduction in earnings opacity is driven by a lower propensity to overstate earnings and is more pronounced among larger banks and in banks with more real estate loan exposure. Our findings highlight the importance of creditors’ monitoring incentives in improving the quality of information disclosure.
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- © THE AUTHOR(S), 2020. PUBLISHED BY CAMBRIDGE UNIVERSITY PRESS ON BEHALF OF THE MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON
Footnotes
We greatly appreciate comments and suggestions by an anonymous reviewer, Stefano Colonello, Reint Gropp, Michael Koetter, and Paul Malatesta (the editor). We also thank conference and seminar participants at the 2017 Royal Economic Society Meeting, at the University of Southampton, at the University of Manchester, and at the IWH Halle.
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