Bank Competition, Loan Portfolio Concentration and Stock Price Crash Risk: The Role of Tone Ambiguity

Abstract

We examine the association between loan portfolio concentration, competition, and stock price crash risk in the U.S. banking industry. We find that during economic downturns, banks with poorly diversified loan portfolios that operate in competitive markets are more likely to crash. Importantly, we show that this link is channeled through aggressive earnings management and ambiguous annual reports. Therefore, managerial ambiguity can serve as an early warning signal of information obfuscation, which can eventually lead to stock price crashes. As a quasi-natural experimental, we use the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018. This policy lowered the regulatory requirements and oversight for a specific group of large banks. The results of a difference-in-differences analysis support our baseline findings and add to the ongoing debate on the roots of the 2023 banking crisis. Therefore, our findings can be informative to market participants, regulators, and policy makers.

Keywords: stock price crash risk; market competition; loan diversification; textual analysis

JEL Classification: G12, G14, G21, G32