Effect of SEC’s Proposed Short-term Borrowing Disclosure Regulation on U.S. Stock Prices

Abstract

This study examines the market reaction to proposed short-term borrowing disclosure regulations and documents a positive market reaction, indicating the usefulness of the disclosure from the vantage point of investors. The 2008 financial crisis, triggered in part by excessive bank borrowing, led to the failure of a number of major financial institutions, including one U.S. investment bank, Lehman Brothers. Investigating the reasons for Lehman’s failure, the bankruptcy examiner determined in March 2010 that the bank had improperly moved $50 billion off its balance sheet by misclassifying short-term trades as sales. This, and similar window-dressing at other major banks, precipitated a Securities and Exchange Commission (SEC) inquiry. In April 2010, the SEC informed Congress that it was considering new rules to discourage financial firms from reducing borrowing in anticipation of their quarter-end reports. Subsequently, in September 2010, the SEC unanimously voted for a proposed “Short-Term Borrowing Disclosure Rule” requiring additional quantitative and qualitative disclosure about short-term borrowing, with the primary objective of improving investors’ understanding of reported amounts of short-term borrowing. The rule would apply to all SEC registrants, with most disclosure required of Int Adv Econ Res (2012) 18:461–463 DOI 10.1007/s11294-012-9371-2