Deferred tax asset revaluations, costly information processing, and bank deposits: Evidence from the Tax Cuts and Jobs Act

Abstract

We examine how information processing costs affect the extent to which depositors use the details in banks’ income statements. Depositors have a unique cost-benefit structure because they are non-professional users of financial information and have high information processing costs. At the same time, they benefit from acting quickly because failing banks make payments on a first-come, first-serve basis. This makes it likely that they will react to a prominent summary measure like the reported net income without adjusting for any risk-irrelevant information included in the line items. In our empirical analysis, we investigate depositors’ behavior as driven by the mechanical revaluations of deferred tax assets due to the 2017 Tax Cuts and Jobs Act. Using a difference-in-difference design, we find deposit withdrawals because of this risk-irrelevant information. In cross-sectional tests, we show that the withdrawals are stronger if the information acquisition costs are low, and the information integration costs are high. Overall, our results show that information processing costs are important for understanding depositors’ reactions to accounting information and can lead to deposit flows that cannot be explained by new risk-relevant information.

Keywords: financial accounting in banks, tax accruals, information processing costs, retail depositors

JEL Classification: G21, G28, M41