The Impact of International Information Disclosure Requirements on Market Discipline

Abstract

Financial regulators are challenged with finding the most efficient and effective ways to monitor banks given an expanding and complex international financial system. Market discipline has grown in importance as a way to discourage banks from taking on unnecessary risk (Barth et al., 2004; Nier & Baumann, 2006). One of the main drivers of market discipline is information disclosure. While the literature on market discipline is expansive, there are no known studies on the impact of individual information disclosure requirements on market discipline. Our study investigates which specific disclosure requirements influence financial investors to discipline banks and which do not. We find that more than half of the information disclosure requirements potentially reduce or have no impact on market discipline practices while the remaining requirements may enhance financial investors’ response to bank risk.

Keywords: Market Discipline, Information Disclosure, Bank Regulation

JEL Classification: G21, G14, E58