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Stress tests and information disclosure

Author

Listed:
  • Itay Goldstein
  • Yaron Leitner

Abstract

Superseded by Working Paper 15-10. We study an optimal disclosure policy of a regulator who has information about banks? ability to overcome future liquidity shocks. We focus on the following trade-off: Disclosing some information may be necessary to prevent a market breakdown, but disclosing too much information destroys risk-sharing opportunities (Hirshleifer effect). We find that during normal times, no disclosure is optimal, but during bad times, partial disclosure is optimal. We characterize the optimal form of this partial disclosure. We also relate our results to the debate on the disclosure of stress test results.

Suggested Citation

  • Itay Goldstein & Yaron Leitner, 2013. "Stress tests and information disclosure," Working Papers 13-26, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:13-26
    Note: Superseded by WP 17-28
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    References listed on IDEAS

    as
    1. Grossman, Sanford J, 1981. "The Informational Role of Warranties and Private Disclosure about Product Quality," Journal of Law and Economics, University of Chicago Press, vol. 24(3), pages 461-483, December.
    2. Admati, Anat R & Pfleiderer, Paul, 2000. "Forcing Firms to Talk: Financial Disclosure Regulation and Externalities," The Review of Financial Studies, Society for Financial Studies, vol. 13(3), pages 479-519.
    3. Itay Goldstein & Philip Bond, 2012. "Government intervention and information aggregation by prices," 2012 Meeting Papers 225, Society for Economic Dynamics.
    4. Hirshleifer, Jack, 1971. "The Private and Social Value of Information and the Reward to Inventive Activity," American Economic Review, American Economic Association, vol. 61(4), pages 561-574, September.
    5. Mike Burkart & Denis Gromb & Fausto Panunzi, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 693-728.
    6. Yaron Leitner, 2005. "Financial Networks: Contagion, Commitment, and Private Sector Bailouts," Journal of Finance, American Finance Association, vol. 60(6), pages 2925-2953, December.
    7. Yaron Leitner, 2012. "Inducing Agents to Report Hidden Trades: A Theory of an Intermediary," Review of Finance, European Finance Association, vol. 16(4), pages 1013-1042.
    8. Edward Simpson Prescott, 2008. "Should bank supervisors disclose information about their banks?," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 94(Win), pages 1-16.
    9. Diamond, Douglas W, 1985. "Optimal Release of Information by Firms," Journal of Finance, American Finance Association, vol. 40(4), pages 1071-1094, September.
    10. Michael J. Fishman & Kathleen M. Hagerty, 2003. "Mandatory Versus Voluntary Disclosure in Markets with Informed and Uninformed Customers," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 19(1), pages 45-63, April.
    11. Michael J. Fishman & Kathleen M. Hagerty, 1990. "The Optimal Amount of Discretion to Allow in Disclosure," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(2), pages 427-444.
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    Citations

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    Cited by:

    1. Robert M. Bushman & Christopher D. Williams, 2015. "Delayed Expected Loss Recognition and the Risk Profile of Banks," Journal of Accounting Research, Wiley Blackwell, vol. 53(3), pages 511-553, June.
    2. Joel Shapiro & David Skeie, 2015. "Information Management in Banking Crises," The Review of Financial Studies, Society for Financial Studies, vol. 28(8), pages 2322-2363.
    3. Gao, Pingyang & Jiang, Xu, 2018. "Reporting choices in the shadow of bank runs," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 85-108.
    4. Fernandes, Marcelo & Igan, Deniz & Pinheiro, Marcelo, 2020. "March madness in Wall Street: (What) does the market learn from stress tests?," Journal of Banking & Finance, Elsevier, vol. 112(C).
    5. João Granja, 2018. "Disclosure Regulation in the Commercial Banking Industry: Lessons from the National Banking Era," Journal of Accounting Research, Wiley Blackwell, vol. 56(1), pages 173-216, March.
    6. Bushman, Robert M., 2014. "Thoughts on financial accounting and the banking industry," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 384-395.
    7. Hernández, Javier & Población García, Francisco Javier & Suárez, Nuria & Tarancón, Javier, 2022. "A study on the EBA stress test results: influence of bank, portfolio, and country-level characteristics," Working Paper Series 2648, European Central Bank.

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    Keywords

    Financial crises; Financial stability;

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