Bank Transparency and the Market’s Perception of Bank Risk

Jinyong Kim (), Mingook Kim () and Yongsik Kim ()
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Jinyong Kim: University of Seoul
Mingook Kim: KAIST College of Business
Yongsik Kim: Securities-Derivatives R&D Center, Korea Exchange

Journal of Financial Services Research, 2020, vol. 58, issue 2, No 2, 115-142

Abstract: Abstract We investigate the effect of bank transparency on systematic and idiosyncratic risk in the stock market. Using the extent of individual banks’ timely recognition of expected loan losses and the amount of discretionary loan loss provisions as proxies for bank transparency, we find that more transparent banks are associated with lower idiosyncratic, and total, stock market risk. We also find that banks that use more discretionary loan loss provisions are associated with a lower ratio of systematic to idiosyncratic risk. In addition, the effect of bank transparency on stock market risk is mainly observed during the financial crisis period. Our results are robust to alternative transparency measures, the possibility of a non-linear relationship, and application of a dimensionality reduction procedure, and offer empirical evidence that providing more bank-specific information about loan portfolio risk mitigates uncertainty about a bank’s future events.

Keywords: Bank transparency; Stock market risk; Loan loss provisions (search for similar items in EconPapers)
JEL-codes: G21 G32 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (4)

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DOI: 10.1007/s10693-019-00323-7

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