João Granja

Disclosure Regulation in the Commercial Banking Industry: Lessons from the National Banking Era

I exploit variation in the adoption of disclosure and supervisory regulation across U.S. states to examine their impact on the development and stability of commercial banks. The empirical results suggest that the adoption of state‐level requirements to report financial statements in local newspapers is associated with greater stability and development of commercial banks. I also examine which political constituencies influence the adoption of disclosure and supervisory regulation. I find that powerful landowners and small private banks are associated with late adoption of these regulations. These findings suggest that incumbent groups oppose disclosure rules because the passage of such rules threatens their private interests.

Competition and Voluntary Disclosure: Evidence from Deregulation in the Banking Industry

We exploit the relaxation of interstate bank branching restrictions in the 1990s to examine how the threat of new entrants aects incumbents’ voluntary disclosure choices. The Interstate Banking and Branching Eciency Act relaxed interstate banking and branching restrictions, thereby increasing competitive entry threats. The Act was implemented over several years and to varying degrees by dierent states, allowing us to identify the eect of changes in potential entry on the voluntary disclosure decisions of both public and private banks. Controlling for changes in actual entry and changes in state-level economies, we find that increases in the threat of new entrants are associated with increases in the level of voluntary disclosure as measured by press releases. Our results are consistent with theoretical predictions that higher levels of entry threats lead to higher levels of disclosure.We use the relaxation of interstate branching restrictions under the Interstate Banking and Branching Efficiency Act (IBBEA) to examine how increases in competition affect incumbents’ voluntary disclosure choices. States implemented the IBBEA over several years and to varying degrees, allowing us to identify the effect of increased competition on the voluntary disclosure decisions of both public and private banks. We find that increases in competition are associated with an increase in press releases. Overall, press releases become more negative in tone as entry barriers decrease. However, disclosures by public banks and by banks issuing equity become incrementally positive in tone when entry barriers decrease. Thus, the increase in disclosure is consistent with a dominant incentive to deter entry via negative information, which is mitigated by an incentive to communicate positive information to investors.

Do Strict Regulators Increase the Transparency of the Banking System

We investigate the role of regulatory incentives on the enforcement of financial reporting transparency in the U.S. banking industry. The previous literature suggests that banking regulators use discretion to facilitate regulatory forbearance. Yet, is not clear whether these actions result from lax oversight or whether they are necessary to prevent further financial instability. Using a novel measure of the quality of regulatory enforcement, we show that strict regulators are more likely to enforce income-reducing reporting choices by forcing banks to restate their overly aggressive call reports. Further, we find that the effect of regulatory strictness on accounting enforcement is strongest in periods leading up to economic downturns and for banks with riskier asset portfolios. Overall, the results from our analyses are consistent with the notion that regulatory incentives play an important role in enforcing financial reporting transparency, particularly in periods leading up to economic crises.