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Debtholder Monitoring Incentives and Bank Earnings Opacity

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  • Danisewicz, Piotr
  • McGowan, Danny
  • Onali, Enrico
  • Schaeck, Klaus

Abstract

We exploit exogenous legislative changes that alter the priority structure of different classes of debt to study how debtholder monitoring incentives affect bank earnings opacity. We present novel evidence that exposing nondepositors to greater losses in bankruptcy reduces earnings opacity, especially for banks with larger shares of nondeposit funding, listed banks, and independent banks. The reduction in earnings opacity is driven by a lower propensity to overstate earnings and is more pronounced among larger banks and in banks with more real estate loan exposure. Our findings highlight the importance of creditors’ monitoring incentives in improving the quality of information disclosure.

Suggested Citation

  • Danisewicz, Piotr & McGowan, Danny & Onali, Enrico & Schaeck, Klaus, 2021. "Debtholder Monitoring Incentives and Bank Earnings Opacity," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(4), pages 1408-1445, June.
    • Handle: RePEc:cup:jfinqa:v:56:y:2021:i:4:p:1408-1445_10
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    Cited by:

    1. Allen N. Berger & Martien Lamers & Raluca A. Roman & Koen Schoors, 2023. "Supply and Demand Effects of Bank Bailouts: Depositors Need Not Apply and Need Not Run," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 55(6), pages 1397-1442, September.
    2. Duqi, Andi & McGowan, Danny & Onali, Enrico & Torluccio, Giuseppe, 2021. "Natural disasters and economic growth: The role of banking market structure," Journal of Corporate Finance, Elsevier, vol. 71(C).
    3. Danisewicz, Piotr & Lee, Chun Hei & Schaeck, Klaus, 2022. "Private deposit insurance, deposit flows, bank lending, and moral hazard," Journal of Financial Intermediation, Elsevier, vol. 52(C).

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