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THE EFFECTS OF BIG BATHS ON BANK OPACITY

K. Stephen Haggard, John S. Howe and Andrew A. Lynch

Journal of Financial Research, 2017, vol. 40, issue 4, 433-454

Abstract: Information asymmetry in the banking sector is important to regulators, analysts, and investors. We examine the change in the information environments of banks following large nonrecurring write†downs (baths) and find a reduction in information asymmetry in the three years following a bath. This result is conditional on the type of asset being written down. Loan†related baths result in a permanent decrease in information asymmetry, but merger†related baths are associated with a transitory increase in information asymmetry. Conversely, baths not related to either loans or mergers result in increased opacity. Consistent with a permanent decrease in information asymmetry, we find an increase in earnings responsiveness in the three years following loan†related baths.

Date: 2017
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https://doi.org/10.1111/jfir.12130

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Journal of Financial Research is currently edited by Jayant Kale and Gerald Gay

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