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Public disclosure, risk, and performance at bank holding companies

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Author Info
Beverly Hirtle

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Abstract

This paper examines the relationship between the amount of information disclosed by bank holding companies (BHCs) and their subsequent risk profile and performance. Using data from the annual reports of BHCs with large trading operations, we construct an index of publicly disclosed information about the BHCs? forward-looking estimates of market risk exposure in their trading and market-making activities. The paper then examines the relationship between this index and the subsequent risk and return in both the BHCs? trading activities and the firm overall, as proxied by equity market returns. The key findings are that more disclosure is associated with lower risk, especially idiosyncratic risk, and in turn with higher risk-adjusted returns. These findings suggest that greater disclosure is associated with more efficient risk taking and thus improved risk-return trade-offs, although the direction of causation is unclear.

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Publisher Info
Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 293.

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Date of creation: 2007
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Handle: RePEc:fip:fednsr:293

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Related research
Keywords: Bank holding companies ; Risk assessment ; Financial risk management;

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This paper has been announced in the following NEP Reports: References listed on IDEAS
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  1. Nier, Erlend & Baumann, Ursel, 2006. "Market discipline, disclosure and moral hazard in banking," Journal of Financial Intermediation, Elsevier, vol. 15(3), pages 332-361, July. [Downloadable!] (restricted)
  2. Julapa Jagtiani & George Kaufman & Catharine Lemieux, 2002. "The Effect of Credit Risk on Bank and Bank Holding Company Bond Yields: Evidence from the Post-FDICIA Period," Journal of Financial Research, Southern Finance Association and Southwestern Finance Association, vol. 25(4), pages 559-575. [Downloadable!] (restricted)
  3. Robert R. Bliss & Mark J. Flannery, 2000. "Market discipline in the governance of U.S. Bank Holding Companies: monitoring vs. influencing," Working Paper Series WP-00-3, Federal Reserve Bank of Chicago. [Downloadable!]
  4. Ursel Baumann & Erlend Nier, 2004. "Disclosure, volatility, and transparency: and empirical investigation into the value of bank disclosure," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 31-45. [Downloadable!]
  5. Jeremy Berkowitz & James O'Brien, 2002. "How Accurate Are Value-at-Risk Models at Commercial Banks?," Journal of Finance, American Finance Association, vol. 57(3), pages 1093-1111, 06. [Downloadable!] (restricted)
  6. Goyal, Vidhan K., 2005. "Market discipline of bank risk: Evidence from subordinated debt contracts," Journal of Financial Intermediation, Elsevier, vol. 14(3), pages 318-350, July. [Downloadable!] (restricted)
  7. Christine M. Cumming & Beverly J. Hirtle, 2001. "The challenges of risk management in diversified financial companies," Economic Policy Review, Federal Reserve Bank of New York, issue Mar, pages 1-17. [Downloadable!]
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  8. Donald Morgan & Kevin Stiroh, 2001. "Market Discipline of Banks: The Asset Test," Journal of Financial Services Research, Springer, vol. 20(2), pages 195-208, October. [Downloadable!] (restricted)
  9. Stewart C. Myers & Raghuram G. Rajan, 1998. "The Paradox Of Liquidity," The Quarterly Journal of Economics, MIT Press, vol. 113(3), pages 733-771, August. [Downloadable!] (restricted)
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  10. Daniel M. Covitz & Diana Hancock & Myron L. Kwast, 2004. "A reconsideration of the risk sensitivity of U.S. banking organization subordinated debt spreads: a sample selection approach," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 73-92. [Downloadable!]
  11. Robert E. Verrecchia & Christian Leuz, 1999. "The Economic Consequences of Increased Disclosure," Working Paper Series: Finance and Accounting 41, Department of Finance, Goethe University Frankfurt am Main. [Downloadable!]
  12. Simon H. Kwan, 2004. "Testing the strong-form of market discipline: the effects of public market signals on bank risk," Working Papers in Applied Economic Theory 2004-19, Federal Reserve Bank of San Francisco. [Downloadable!]
  13. Kevin Stiroh, 2006. "New Evidence on the Determinants of Bank Risk," Journal of Financial Services Research, Springer, vol. 30(3), pages 237-263, December. [Downloadable!] (restricted)
  14. Darryll Hendricks & Beverly Hirtle, 1997. "Bank capital requirements for market risk: the internal models approach," Economic Policy Review, Federal Reserve Bank of New York, issue Dec, pages 1-12. [Downloadable!]
  15. Donald P. Morgan, 2002. "Rating Banks: Risk and Uncertainty in an Opaque Industry," American Economic Review, American Economic Association, vol. 92(4), pages 874-888, September. [Downloadable!]
  16. Beverly J. Hirtle, 2003. "What market risk capital reporting tells us about bank risk," Economic Policy Review, Federal Reserve Bank of New York, issue Sep, pages 37-54. [Downloadable!]
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