The role of information disclosure in financial intermediation with investment risk

Yi Chen and Kai Du

Journal of Financial Stability, 2020, vol. 46, issue C

Abstract: We study how information disclosure affects financial intermediation when the payoff to the long-term investment is risky. The analysis is based on a business-cycle version of the bank run model wherein a bank provides risk sharing to demand depositors who experience unobservable shocks to their liquidity preferences. The bank pre-commits to the precision of an interim signal regarding the payoff to the long-term investment. We examine the impact of bank disclosure on optimal risk sharing achieved by run-proof, signal-contingent demand-deposit contracts. We show that for utility functions that display non-increasing absolute risk aversion, more informative disclosure improves the ex ante risk sharing provided by financial intermediation.

Keywords: Financial intermediation; Risk sharing; Disclosure; Non-increasing absolute risk aversion (search for similar items in EconPapers)
JEL-codes: G21 G28 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:46:y:2020:i:c:s1572308919306710

DOI: 10.1016/j.jfs.2019.100720

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