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http://ssrn.com/abstract=2330404
 
 

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Did Information Intermediaries See the Warning Signals of the Banking Crisis from Leading Indicators in Banks’ Financial Statements?


Hemang Desai


Southern Methodist University - Cox School of Business

Shivaram Rajgopal


Emory University - Goizueta Business School

Jeff Jiewei Yu


Southern Methodist University - Cox School of Business

September 24, 2013


Abstract:     
In this paper we address two important questions that emerged in the aftermath of the recent banking crisis. First, did the financial statements of the bank holding companies provide an early warning of their impending distress? Second, whether the actions of four key financial intermediaries (short sellers, equity analysts, Standard Poor’s credit ratings and auditors) were sensitive to the information in the banks’ financial statements about their increasing risk and their approaching distress? We find a significant cross-sectional association between the banks’ 2006 4Q financials and bank failures over 2008-2010 suggesting that the financial statements reflected at least some of the increased risk of bank distress in advance. The mean abnormal short interest in our sample of banks spikes from 0.66% in March 2005 to 2.4% in March 2007. This increase in short interest is also accompanied by a sharp increase over time in the cross-sectional association between short interest and leading financial statement indicators. In contrast, we observe neither a meaningful change in analysts’ recommendations, Standard and Poor’s credit ratings and audit fees nor an increased sensitivity of these actions to financial indicators of bank distress over this time period. Overall, our results suggest that actions of short sellers likely provided an early warning of banks’ upcoming distress prior to 2008 crisis.

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Date posted: September 26, 2013 ; Last revised: September 27, 2013

Suggested Citation

Desai, Hemang and Rajgopal, Shivaram and Yu, Jeff Jiewei, Did Information Intermediaries See the Warning Signals of the Banking Crisis from Leading Indicators in Banks’ Financial Statements? (September 24, 2013). Available at SSRN: http://ssrn.com/abstract=2330404 or http://dx.doi.org/10.2139/ssrn.2330404

Contact Information

Hemang Desai (Contact Author)
Southern Methodist University - Cox School of Business ( email )
Cox School of Business
6212 Bishop Blvd.
Dallas, TX 75275-0333
United States
214-768-3185 (Phone)
214-768-4099 (Fax)
Shivaram Rajgopal
Emory University - Goizueta Business School ( email )
1300 Clifton Road
Atlanta, GA 30322-2722
United States
Jeff Jiewei Yu
Southern Methodist University - Cox School of Business ( email )
3000 Fondren DR
Dallas, TX 75205
United States
214-768-8321 (Phone)
214-768-4099 (Fax)
HOME PAGE: http://www.cox.smu.edu/web/jeff-yu
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References:  72
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