Reporting Choices in the Shadow of Bank Runs
51 Pages Posted: 12 Dec 2015 Last revised: 14 Jul 2017
Date Written: June 5, 2017
This paper investigates banksreporting 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 banks 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 banks vulnerability to panic-based runs. Finally, a given banks 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: Suggested Citation