Banks' disclosure choices in the presence of adverse selection and runs

Accounting and Management Control

Speaker: Lucas Mahieux (Tilburg University)

Room: T004

Abstract:

We present a theory of bank disclosure in which banks face both adverse selection and bank run 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 optimal level of bank disclosure exhibits an inverse-U shape against profitability. In addition, when the bank run risk is large, 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.