Coordination and Conservatism

Tong Lu and Lijun Ruan

Finance Research Letters, 2024, vol. 61, issue C

Abstract: This study investigates the role of accounting conservatism in bank depositors’ coordination problem in Keynesian beauty contests. Even if the fundamental state of bank loans is sound, fear of premature withdrawals by other depositors may lead to a depositor’s premature withdrawal, undermining the loan value. Higher precision of public disclosures is a double-edged sword: it exacerbates the coordination risk in bad times, even though it mitigates it in good times. We find that accounting conservatism is a useful built-in mechanism to tackle this tradeoff. Moreover, as the bank-run risk rises, more conservatism is desirable. Our study also generates regulatory implications for panic-based bank runs and empirical implications for cost of debt capital.

Keywords: Coordination; Cost of debt capital; Accounting conservatism; Bank-run risk (search for similar items in EconPapers)
JEL-codes: G01 G21 M41 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:61:y:2024:i:c:s1544612324000655

DOI: 10.1016/j.frl.2024.105035

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