Reporting Choices in the Shadow of Bank Runs

51 Pages Posted: 12 Dec 2015 Last revised: 14 Jul 2017

See all articles by Pingyang Gao

Pingyang Gao

Booth School of Business, University of Chicago

Xu Jiang

Duke University

Date Written: June 5, 2017

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, Guay, Mehran, and Weber (2016) and Bushman (2016) to understand better the effects of banks’ special features on their reporting choices.

Keywords: Disclosure, Discretion, Market Discipline, Bank Runs, Financial Regulation

JEL Classification: G20, G28

Suggested Citation

Gao, Pingyang and Jiang, Xu, Reporting Choices in the Shadow of Bank Runs (June 5, 2017). Chicago Booth Research Paper No. 15-51. Available at SSRN: https://ssrn.com/abstract=2702504 or http://dx.doi.org/10.2139/ssrn.2702504

Pingyang Gao (Contact Author)

Booth School of Business, University of Chicago ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

Xu Jiang

Duke University ( email )

100 Fuqua Drive
Durham, NC 27708-0204
United States

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