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Financial distress and banks' communication policy in crisis times

Damien Besancenot () and Radu Vranceanu ()

No DR 08018, ESSEC Working Papers from ESSEC Research Center, ESSEC Business School

Abstract: This short paper analyzes banks' communication policies in crisis times and the role of imperfect information in enhancing banks' distress. If banks differ in their exposure to risky assets, fragile banks may claim to be solid only in order to manipulate investors' expectations. Then solid banks must pay a larger interest rate than in a perfect information set-up. A stronger sanction for false information would improve the situation of the low-risk banks but deteriorate the situation of the high-risk banks. The total effect on defaulting credit institutions is ambiguous. It is shown that, in some cases, the optimal sanction is lower than the sanction that rules out any manipulatory behaviour.

Keywords: Banks; Disclosure; Financial Crisis; Transparency (search for similar items in EconPapers)
JEL-codes: D82 E44 G21 (search for similar items in EconPapers)
Pages: 18 pages
Date: 2008-11
New Economics Papers: this item is included in nep-ban, nep-cta, nep-fmk and nep-mac
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Journal Article: Financial Distress And Banks'communication Policy In Crisis Times (2010) Downloads
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