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Reporting choices in the shadow of bank runs

Pingyang Gao and Xu Jiang

Journal of Accounting and Economics, 2018, vol. 65, issue 1, 85-108

Abstract: This paper investigates banks’ reporting choices in the context of bank runs. A fundamental-based run imposes market discipline on insolvent banks, but a panic-based run closes banks that could have survived with better coordination among creditors. We augment a bank-run model with the bank’s reporting choices. We show that banks with intermediate fundamentals have stronger incentive to misreport than those in the two tails. Moreover, reporting discretion reduces panic-based runs, but excessive discretion also reduces fundamental-based runs. The optimal amount of reporting discretion increases in the bank’s vulnerability to panic-based runs. Finally, a given bank’s opportunistic use of reporting discretion exerts a negative externality on other banks. Our paper answers the call by Armstrong et al. (2016) and Bushman (2016) to understand better the effects of banks’ special features on their reporting choices.

Keywords: Banking; Bank runs; Bank stability; Accounting discretion; Bank transparency (search for similar items in EconPapers)
JEL-codes: E58 G21 G32 M41 (search for similar items in EconPapers)
Date: 2018
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Journal of Accounting and Economics is currently edited by J. L. Zimmerman, S. P. Kothari, T. Z. Lys and R. L. Watts

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Handle: RePEc:eee:jaecon:v:65:y:2018:i:1:p:85-108