Debtholder Monitoring Incentives and Bank Earnings Opacity

Journal of Financial and Quantitative Analysis (Forthcoming)

64 Pages Posted: 7 Feb 2020

See all articles by Piotr Danisewicz

Piotr Danisewicz

University of Bristol; University of Zurich

Danny McGowan

University of Birmingham; affiliation not provided to SSRN

Enrico Onali

University of Exeter Business School

Klaus Schaeck

University of Bristol

Date Written: January 26, 2020

Abstract

We exploit exogenous legislative changes that alter the priority structure of different classes of debt to study how debtholder monitoring incentives affect bank earnings opacity. We present novel evidence that exposing nondepositors to greater losses in bankruptcy reduces bank earnings opacity, especially for banks with larger shares of nondeposit funding, listed banks, and independent banks. The reduction in earnings opacity is driven by a lower propensity to overstate earnings and becomes larger during crises, when the incentive to conceal capital shortfalls is stronger. Our findings highlight the importance of creditors’ monitoring incentives in improving the quality of information disclosure.

Keywords: debtholder monitoring incentives, bank earnings opacity, earnings management, debt structure

JEL Classification: G21; G28

Suggested Citation

Danisewicz, Piotr and McGowan, Danny and Onali, Enrico and Schaeck, Klaus, Debtholder Monitoring Incentives and Bank Earnings Opacity (January 26, 2020). Journal of Financial and Quantitative Analysis (Forthcoming), Available at SSRN: https://ssrn.com/abstract=3525766 or http://dx.doi.org/10.2139/ssrn.3525766

Piotr Danisewicz

University of Bristol ( email )

School of Economics, Finance and Management
The Priory Road Complex
Bristol, BS8 1TU
United Kingdom

University of Zurich ( email )

Institute for Banking & Finance
Zurich, 8001
Switzerland

Danny McGowan

University of Birmingham ( email )

Edgbaston, Birmingham B15 2TT
United Kingdom

affiliation not provided to SSRN

Enrico Onali

University of Exeter Business School ( email )

Exeter
United Kingdom

Klaus Schaeck (Contact Author)

University of Bristol ( email )

University of Bristol,
Senate House, Tyndall Avenue
Bristol, BS8 ITH
United Kingdom

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