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Coordination and Conservatism

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  • Lu, Tong
  • Ruan, Lijun

Abstract

This study investigates the role of accounting conservatism in bank depositors’ coordination problem in Keynesian beauty contests. Even if the fundamental state of bank loans is sound, fear of premature withdrawals by other depositors may lead to a depositor’s premature withdrawal, undermining the loan value. Higher precision of public disclosures is a double-edged sword: it exacerbates the coordination risk in bad times, even though it mitigates it in good times. We find that accounting conservatism is a useful built-in mechanism to tackle this tradeoff. Moreover, as the bank-run risk rises, more conservatism is desirable. Our study also generates regulatory implications for panic-based bank runs and empirical implications for cost of debt capital.

Suggested Citation

  • Lu, Tong & Ruan, Lijun, 2024. "Coordination and Conservatism," Finance Research Letters, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:finlet:v:61:y:2024:i:c:s1544612324000655
    DOI: 10.1016/j.frl.2024.105035
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    More about this item

    Keywords

    Coordination; Cost of debt capital; Accounting conservatism; Bank-run risk;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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