Banks’ Disclosure Choices in the Presence of Adverse Selection and Runs

42 Pages Posted: 16 Feb 2022 Last revised: 13 Feb 2023

See all articles by Carlos Corona

Carlos Corona

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Lucas Mahieux

Tilburg University - Tilburg University School of Economics and Management

Date Written: February 13, 2023

Abstract

The transparency of banks about the prospects of their risky assets is an issue of great importance. In this paper, we present a theory of bank disclosure in which banks face both adverse selection and bank run/rollover risk. In our model, banks disclose information to reduce adverse selection in credit markets, but information disclosure can also trigger inefficient bank runs. We show that the level of disclosure chosen by banks and the associated probability of a run have parallel behaviors as a function of bank profitability. Moreover, the equilibrium level of bank disclosure exhibits an inverse-U shape against bank profitability. In addition, when bank runs are very costly, the disclosure level decreases and may become conservative. Conservatism makes bad news less informative, which may help prevent bank runs. Our model also provides several regulatory implications and is consistent with recent empirical findings.

Keywords: Adverse selection, Banks, Bayesian Persuasion, Disclosure, Runs

JEL Classification: G21, G28, M41, M48

Suggested Citation

Corona, Carlos and Mahieux, Lucas, Banks’ Disclosure Choices in the Presence of Adverse Selection and Runs (February 13, 2023). Available at SSRN: https://ssrn.com/abstract=4034747 or http://dx.doi.org/10.2139/ssrn.4034747

Carlos Corona

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

HOME PAGE: http://https://fisher.osu.edu/people/corona.55

Lucas Mahieux (Contact Author)

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
161
Abstract Views
711
Rank
327,827
PlumX Metrics