Bank Restatements and Financial System Stability

46 Pages Posted: 19 Jan 2017 Last revised: 6 Jul 2019

See all articles by Marie Herly

Marie Herly

Department of Economics and Business Economics, Aarhus University

Date Written: July 01, 2019

Abstract

This paper investigates whether and how restatements in banks affect financial system stability. I find that banks contribute more to systemic risk up to four quarters after a restatement, and that the restatement effect on systemic risk is larger for banks that (i) are very interconnected to other banks, (ii) rely heavily on short-term funding, and (iii) experienced severely negative market reactions to the restatement. These findings suggest that the uncertainty following bank restatements spills over to the system through the overlapping claims between financial institutions (liability side), not through positively correlated risk factors on banks' balance sheets (asset side).

Keywords: Earnings restatements; Bank transparency; Bank stability; Financial contagion; Instrumental variables

JEL Classification: G14; G21; M41; M48

Suggested Citation

Herly, Marie, Bank Restatements and Financial System Stability (July 01, 2019). Available at SSRN: https://ssrn.com/abstract=2900894 or http://dx.doi.org/10.2139/ssrn.2900894

Marie Herly (Contact Author)

Department of Economics and Business Economics, Aarhus University ( email )

Fuglesangs Alle 4
Aarhus V, 8210
Denmark
87164050 (Phone)

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