Downside belief disagreements and financial instability: Evidence from risk factor disclosures in U.S. financial institutions’ 10-K filings

Rui Li, Jianping Li and Xiaoqian Zhu

Journal of International Financial Markets, Institutions and Money, 2025, vol. 99, issue C

Abstract: At what point does the shift from a stable to an unstable financial system occur? This study develops the first measurement of downside belief disagreements by utilizing the qualitative disclosures of risk factors in U.S. financial institutions’ 10-K filings. We show that the transition into financial instability occurs with a large increase in downside belief disagreements. Notably, it is not only downside belief disagreements but also its interaction with rapid credit expansion that matters for financial stability risks. We further conduct mechanism tests and find that downside belief disagreements harm financial stability by imposing credit constraints and price reductions.

Keywords: Belief disagreements; Financial stability; Risk disclosures; Credit constraints (search for similar items in EconPapers)
JEL-codes: E32 G01 G21 G41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:99:y:2025:i:c:s1042443125000083

DOI: 10.1016/j.intfin.2025.102118

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