Does Distance Impede Regulatory Monitoring? Evidence from the Banking Industry

44 Pages Posted: 17 Jan 2017

See all articles by Ivan Lim

Ivan Lim

Leeds University Business School

Jens Hagendorff

University of Edinburgh - Business School

Seth Armitage

University of Edinburgh - Accounting and Finance

Date Written: October 12, 2016

Abstract

We examine how the information environment influences bank regulatory monitoring. Using the distance between banks and regulatory field offices as a proxy for information asymmetry, we show that an increase in distance reduces the quality of financial reporting. To establish causality, we use a quasi-natural experiment that exploits multiple exogenous shocks to distance, an instrumental variable approach as well as the enactment of the FDICIA Act of 1991 as a shock to the information environment. We provide evidence that regulators make use of local informational advantages to enforce better quality financial reporting. We further show that despite informational advantages, regulators choose when to increase regulatory scrutiny and chose not to do so during the financial crisis. Overall, our study underscores the importance of local information in regulatory monitoring.

Suggested Citation

Lim, Ivan and Hagendorff, Jens and Armitage, Seth, Does Distance Impede Regulatory Monitoring? Evidence from the Banking Industry (October 12, 2016). Available at SSRN: https://ssrn.com/abstract=2807421 or http://dx.doi.org/10.2139/ssrn.2807421

Ivan Lim (Contact Author)

Leeds University Business School ( email )

Maurice Keyworth Building
Moorland Road
Leeds, UK
United Kingdom

Jens Hagendorff

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

Seth Armitage

University of Edinburgh - Accounting and Finance ( email )

29 Buccleuch Place
Edinburgh, EH8 9JS
United Kingdom
44 131 650 3794 (Phone)

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