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Debtholder Monitoring Incentives and Bank Earnings Opacity

Published online by Cambridge University Press:  09 October 2020

Piotr Danisewicz ,
Danny McGowan ,
Enrico Onali  and
Klaus Schaeck Open the ORCID record for Klaus Schaeck [Opens in a new window]
Piotr Danisewicz
Affiliation:
University of Bristolpiotr.danisewicz@bristol.ac.uk
Danny McGowan
Affiliation:
University of Birminghamd.mcgowan@bham.ac.uk
Enrico Onali
Affiliation:
University of Exetere.onali@exeter.ac.uk
Klaus Schaeck*
Affiliation:
University of Bristolklaus.schaeck@bristol.ac.uk
*
klaus.schaeck@bristol.ac.uk (corresponding author)
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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.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 4 , June 2021 , pp. 1408 - 1445
Copyright
© THE AUTHOR(S), 2020. PUBLISHED BY CAMBRIDGE UNIVERSITY PRESS ON BEHALF OF THE MICHAEL G. FOSTER SCHOOL OF BUSINESS, UNIVERSITY OF WASHINGTON

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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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