Bank accounting disclosure, information content in stock prices, and stock crash risk

Abstract

Purpose This paper aims to examine how banks’ accounting disclosure policies affect information content in stock prices and stock crash risk. Design/methodology/approach This paper uses 1996-2013 as the sample period. The final sample includes 10,045 observations in 37 countries. This paper uses stock return synchronicity to measure information content in stock prices. This study uses the frequency difference between extremely negative and positive stock returns to measure stock crash risk. To measure the level of bank accounting disclosure, this research follows Nier and Baumann (2006) to construct an aggregate disclosure index based on inclusions and omissions of a series of items in a bank’s annual accounting reports. Findings This paper finds that banks’ stocks have lower stock return synchronicity and fewer extremely negative returns if banks have higher levels of financial statement disclosure. These results suggest that banks’ stocks have higher information content and lower crash risk if banks’ information environment is more transparent. Originality/value Overall, this paper provides new insight about how to increase banks’ transparency and the safety of the banking industry, which is beneficial to economic growth. To increase banks’ transparency and reduce the possibility of extremely negative stock returns, one way to regulate banks is to increase their accounting disclosure. In addition, the extant literature (Chen et al., 2006, Durnev et al., 2003, 2004; Wurgler, 2000) demonstrates that firms with lower stock return synchronicity have more transparent information environments and higher investment efficiency. Thus, this paper finds that higher levels of bank accounting disclosure are associated with lower stock return synchronicity, which further reduces banks’ opacity and increases banks’ investment efficiency. Finally, compared to business firms, stock crash risk has much direr consequences because one bank’s stock crash will affect overall financial stability. Thus, it is important for authorities to know the effects of accounting disclosure on bank stock crash risk.