Pacific Accounting Review

Bank Accounting Disclosure, Information Content in Stock Prices and Stock Crash Risk: Global Evidence
Liang Song Chan Du Jia Wu
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Liang Song Chan Du Jia Wu , (2016),"Bank Accounting Disclosure, Information Content in Stock Prices and Stock Crash
Risk: Global Evidence", Pacific Accounting Review, Vol. 28 Iss 3 pp. -
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 Bank Accounting Disclosure, Information Content in Stock
Prices, and Stock Crash Risk: Global Evidence

Abstract

This research examines the effects of banks’ accounting disclosure policies on information
content in stock prices and stock crash risk. Employing data taken from 37 countries, this paper
finds that banks’ stocks experience lower stock return synchronicity and fewer extremely
negative returns if banks have higher levels of financial statement disclosure. These results
suggest that banks’ stocks have higher information content and lower crash risk if banks’
information environment is more transparent. Thus, this study provides new insight about how
to increase banks’ transparency and the safety of the banking industry, which is beneficial to
economic growth.
Pacific Accounting Review 2016.28.

JEL Classification Numbers: M41; M48

Keywords: accounting disclosure; stock return synchronicity; stock crash risk

Acknowledgements
Part of work was completed when Liang Song was working as a visiting scholar at
European Central Bank, Germany and Bank of Finland, Finland. This research has
begun as part of Dr. Liang Song’s dissertation at Rensselaer Polytechnic Institute.

1
 1. Introduction

The existing literature has shown the beneficial effects of accounting disclosure for business

firms.1 This paper contributes to the previous literature by examining how banks’ accounting

disclosure policies affect information content in stock prices and stock crash risk. This research

focuses on the banking industry because banks perform important functions of allocating

resources to economies around the world, monitoring business firms, and promoting economic

growth (see Levine, 2005 for a survey). In addition, banks’ financial statements are more

complicated to read for external investors than business firms because they include customized
Pacific Accounting Review 2016.28.

bank loan contacts and complex financial derivatives (Greenspan, 1996).

More importantly, the recent global financial crises indicate inadequate dissemination of

bank accounting information to public investors, which spurs a debate about how to increase

bank accounting transparency and the safety of the banking industry (Flannery et al., 2012).

Specifically, Gorton (2009) examines the history and theory about contagion and crises in the

banking industry and argues that contagion cannot completely avoided by stricter regulations.

Chancellor (1999) presents an interesting history of financial speculation and how such activity

affects the wider financial system and financial crises. Madura et al., (1991) use event study

methodology to illustrate contagion internationally. This paper contributes to this debate by

investigating whether banks’ superior accounting disclosure policies can increase information

content in stock prices and reduce stock crash risk.

1
Specifically, Villiers and Staden (2012) find that most shareholders react positively to environmental information disclosure.
Song and Tuoriniemi (2015) show that banks provide more favorable loan contracting terms to firms with superior accounting
quality. Marsden et al., (2011) demonstrate that New Zealand's disclosure reform has reduced information asymmetry problems.
Russell (2015) presents evidence that continuous firm disclosure positively affects stock price adjustment to information.

2
 To examine the effects of bank accounting disclosure on information content in stock

prices, this paper employs stock return synchronicity to measure information content in stock

prices. Stock return synchronicity is determined by two factors, such as variations of bank-

specific fundamentals and bank stock price informativeness (Morck et al., 2000). If global banks

carry the same type of liabilities on their balance sheets, there are low variations of bank-specific

fundamentals. Therefore, there is high stock return synchronicity and contagion cannot be

avoided. In the estimations, we control for the effects of variations of bank-specific fundamentals

and thus lower stock return synchronicity only indicates higher stock price informativeness.2

According to the theoretical model proposed by Veldkamp (2006), if bank-specific information

Pacific Accounting Review 2016.28.

is less available to external investors because of the absence of adequate bank financial statement

disclosure, investors will depend more on market-wide information to trade. Thus, bank stocks

are more aligned with the entire market, have higher stock return synchronicity, and incorporate

less bank-specific information content.

To investigate the influences of bank accounting disclosure on stock price crash risk, this

paper employs the frequency difference between extremely negative and positive stock returns to

measure stock crash risk. According to the theoretical predictions proposed by Jin and Myers

(2006), if banks’ financial statement disclosure standards are poor, it may indicate that banks

hide a lot of negative information. When the cost of withholding such bad information

accumulates and banks cannot afford it, banks may release all the negative information suddenly.

Thus, their stocks will be more likely to have extremely negative return and crash.

To measure the level of bank accounting disclosure, this paper follows Nier and

Baumann (2006) to construct an aggregate disclosure index based on inclusions and omissions of

2
We use Bank_Earnings_Comovement to control for the effects of variations of bank-specific fundamentals. This variable is
defined as a logistic transformed r square, estimated from a regression of a bank’s return on assets on an aggregate banking
industry index of return on assets. Lower values indicate greater variations of bank-specific fundamentals.

3
 a series of items in a bank’s annual accounting reports.3 Employing data from 37 countries, this

research finds that banks’ stocks experience lower stock return synchronicity and fewer

extremely negative returns if banks have better financial statement disclosure. These results

suggest that banks’ stocks have higher information content and lower crash risk if banks’

information environments are more transparent.

This paper also conducts several robustness tests. The government is more likely to bail

out large banks (Gandhi and Lustig, 2013). Therefore, large banks and small banks may differ in

terms of the effects of bank accounting disclosure policies and our results may not be robust in

the subsample including only large or small banks. To address this concern, we divide the
Pacific Accounting Review 2016.28.

sample into four quartiles according to banks’ total assets in each country year and run the

estimations in each quartile. The conclusions still hold in the subsamples. In addition, there are a

large number of U.S. banks in the sample, which may affect the results. To deal with this issue,

we run the estimations in the subsample without U.S. banks and the results are still robust.

Finally, the stock return synchronicity measure may be underestimated if the data series contains

crash episodes. To address this problem, an alternative measure of bank stock synchronicity is

also developed based on the data without crash events. The conclusions still hold in the

robustness tests, which uses this alternative measure of bank stock synchronicity.

This paper advances the extant literature in several ways. First, the existing literature

(Haggard et al., 2008; Hutton et al., 2009; Jin and Myers, 2006) has shown the effects of

accounting disclosure on information contents in stock prices and stock crash risk for business

firms. Compared to business firms, banks’ financial statements are harder to evaluate because of

the existence of privately negotiated loan contracts and complex financial derivatives (Greenspan,

3
Lang and Lundholm (1993) find that the amount of annual report disclosure is highly correlated with the level of disclosure by
other media.

4
 1996). Moreover, stock crash risk has much more dire consequences in the banking industry

because one bank’s stock crash will affect overall financial stability. Thus, this paper provides

new insight about the effects of accounting disclosure by examining its influences on stock price

informativeness and stock crash risk in the banking industry. It is important for authorities to

know the effects of accounting disclosure on bank stock crash risk.

In addition, this study contributes to the literature (Nier, 2005; Nier and Baumann, 2006)

about the influence of accounting disclosure in the banking industry on overall financial stability

and banking sector risks. In this paper, we investigate the effects of bank accounting disclosure

on stock price crash risk. Stock price crash risk is measured by extremely negative stock returns.
Pacific Accounting Review 2016.28.

It is different compared to traditional bank risk measures and it may be hard to be diversified

(Ibragimov and Walden, 2007). We also examine how bank accounting disclosure affects

information contents in stock prices, which has not been investigated in the previous literature.

The remainder of this research proceeds as follows. Section 2 discusses the related

literature and then develops hypotheses. Section 3 describes the definitions of the variables.

Section 4 shows the sample data and descriptive statistics. Section 5 presents the results. Section

6 concludes the paper.

2. Hypothesis

The extant literature has shown that stock crash risk and contagion in the banking

industry may disrupt overall financial stability. Specifically, Gorton (2009) describes the history

and theory about contagion and crises in the banking industry. He also describes the causes of

financial contagion, which is hard to avoid despite various regulation and insurance attempts.

Chancellor (1999) presents an interesting history of financial speculation and how such activity

5
 influences the financial bubble and financial crises. Madura et al., (1991) employ event study

methodology to illustrate contagion internationally. They find that British bank stock prices react

negatively to the announcement of Citicorp's loss. Therefore, it is an important question about

how to increase the accounting transparency and the safety of the banking industry (Flannery et

al., 2012).

This paper first examines the effects of bank accounting disclosure on information

content in stock prices. This research employs stock return synchronicity to measure information

content in stock prices. Stock return synchronicity is negatively associated with variations of

bank-specific fundamentals and bank stock price informativeness (Morck et al., 2000). There is
Pacific Accounting Review 2016.28.

high stock return synchronicity and contagion cannot be avoided if global banks carry the same

type of liabilities on their balance sheets, which indicates that there are low variations of bank-

specific fundamentals. In this paper, we control for variations of bank-specific fundamentals and

thus lower stock return synchronicity only indicates higher stock price informativeness.

Grossman and Stiglitz (1980), Morck et al. (2000), and Veldkamp (2006) argue that the cost to

collect firm-specific information is the determinant of information content in stock prices. If

there is not adequate bank financial statement disclosure, it is too expensive for external

investors to collect firm-specific information and incorporate it into stock prices by informed

arbitrage. Therefore, stock prices will include more market-wide information and will be more

synchronized with the entire market.

This paper also examines the influence of bank accounting disclosure on stock crash risk.

According to the theoretical predictions proposed by Jin and Myers (2006), if banks do not

disclose enough financial information, it may show that banks withhold a lot of bad information.

When the cost of hiding such negative information accumulates and banks cannot afford it,

6
 banks may release all the bad information suddenly. Thus, their stocks will be more likely to

crash and have extremely negative return.

Consistent with the above theoretical predictions, Haggard et al. (2008) show that stock

of business firms with higher levels of voluntary disclosure have lower stock return

synchronicity and lower stock crash risk. Hutton et al. (2009) find that stocks of business firms

with better accounting quality are less aligned with the entire market and are less likely to crash.

Jin and Myers (2006) demonstrate that stocks of business firms are less synchronized with the

entire market and have less crash risk in a country with a more transparent information

environment.
Pacific Accounting Review 2016.28.

The existing literature has shown the beneficial effects of accounting disclosure for

business firms. Specifically, Villiers and Staden (2012) find that most shareholders react

positively to environmental information disclosure. Song and Tuoriniemi (2015) demonstrate

that banks provide more favorable loan contracting terms to firms with superior accounting

quality. Marsden et al., (2011) show that New Zealand's disclosure reform has reduced

information asymmetry problems. Russell (2015) presents evidence that continuous firm

disclosure positively affects stock price adjustment to information.

Compared to business firms, banks’ financial statements are more complicated to read for

outside investors because of customized bank loan contacts and complex financial derivatives

(Greenspan, 1996). To measure the level of bank accounting disclosure, this paper follows Nier

and Baumann (2006) to construct a composite disclosure index based on inclusions and

omissions of items in a bank’s annual accounting reports. Although this index can only measure

the level of bank accounting reports, Lang and Lundholm (1993) demonstrate that the amount of

annual report disclosure is highly associated with the level of disclosure by other media. Using

7
 this index, Nier (2005) shows that enhanced bank disclosure can improve overall financial

stability. Nier and Baumann (2006) find that better bank annual report disclosure can reduce

banking sector risks.

Based on the above discussions, if a bank has superior accounting disclosure, it reduces

the cost for external investors to collect bank-specific information. Thus, the stock is less aligned

with the entire market and has lower stock return synchronicity. In addition, a bank with superior

accounting disclosure is less likely to hide a lot of negative information and thus has less stock

crash risk. The formal hypothesis is as below:

Pacific Accounting Review 2016.28.

Hypothesis: If a bank has superior accounting disclosure policies, its stocks experience lower

stock return synchronicity and lower crash risk.

3. Variable constructions

The key variable is Bank_Accounting_Disclosure, which is created based on the

Bankscope database. To construct this variable, this study follows Nier and Baumann (2006). As

mentioned in Nier and Baumann (2006), “To arrive at the disclosure index we define a number

of dimensions of accounting information which we think can be mapped into indicators of bank

risk. A total of 18 subindices are created which reflect whether the bank’s accounts (as presented

in Bankscope) provide any detail on each dimension. The subindices are then aggregated to form

a composite disclosure index.” Higher values of this variable indicate higher levels of bank

accounting disclosure. More details about the construction of the variable

Bank_Accounting_Disclosure can be found in Appendix A.

8
 This research also follows Hutton et al. (2009) and Jin and Myers (2006) to develop the

variables Bank_Stock_Synchronicity and Bank_Crash_Risk. The variable

Bank_Stock_Synchronicity is defined as a logistic transformed r square, estimated in Equation

(1). Higher values of this variable indicate lower information content in stock prices after we

control for the effects of variations of bank-specific fundamentals. The variable

Bank_Crash_Risk is measured as the frequency difference between negative return outliers and

positive return outliers. Negative return outliers are residual returns from the estimation of

Equation (1), which are less than 1 percentile of the distribution. Positive return outliers are

residual returns from the estimation of Equation (1), which are more than 99 percentile of the
Pacific Accounting Review 2016.28.

distribution. This variable is expressed in percentage. Higher values of this variable indicate

higher crash risk. We also create an alternative measure of bank stock synchronicity, which is

employed in the robustness tests. Specifically, the variable Bank_Stock_Synchronicity_1 is

constructed as a logistic transformed r square, estimated in Equation (1) based on the data

without negative return outliers.

return = α i + β1return ind + β 2 return m + β 3 [returnUS + exrate ] + ε (1)

The variable return is equal to a bank’s weekly return, which is calculated based on

Wednesday’s stock price data from the Datastream database. The variable returnind is defined as

an aggregate banking industry’s return in a particular country excluding the stock return of the

bank in question. The variable returnm is measured as the market return in a certain country. The

variable returnus is constructed as the U.S. market return. The variable exrate equals the return

based on the exchange rate between the U.S. and a certain country. When the bank is the U.S.

9
 bank, (returnus + exrate) is excluded in the estimation. To make sure that there are enough data

to estimate Equation (1), bank-year observations without 30 weeks of trading data and country-

year observations without 3 banks are excluded.

Two country-level variables such as GDP_Growth_Variance and Log_GDP_Per_Capita

are constructed based on the World Development Indicators database. The variable

GDP_Growth_Variance is defined as the previous four-year variance of a country’s GDP per

capita growth. The variable Log_GDP_Per_Capita is measured as the logarithm of a country’s

GDP per capita. We also develop the variable Foreign_Ownership as the percentage of banking

system's assets in banks that are 50% or more foreign owned, which are taken from the World
Pacific Accounting Review 2016.28.

Bank surveys (Barth et al., 2008, 2012).

Three bank-level variables based on the Bankscope database are created. Specifically, the

variable Bank_Size is equal to the logarithm of a bank’s total assets. The variable

Bank_Nonperforming_Loan equals a bank’s total problem loans scaled by its total assets. We

define the variable Bank_Earnings_Comovement as a logistic transformed r square, estimated

from a regression of a bank’s return on assets on an aggregate banking industry index of return

on assets. The estimation uses 6 most recent annual observations.

4. Sample and descriptive statistics

This paper employs 1996-2013 as the sample period. To construct the sample, we merge

the key independent variable Bank_Accounting_Disclosure, which is created based on the

Bankscope database, with the dependent variables Bank_Stock_Synchronicity and

Bank_Crash_Risk, which is constructed based on the Datastream database. The final sample

includes 10,045 observations in 37 countries, such as the United States, United Kingdom, Turkey,

10
 Thailand, Sweden, Spain, South Africa, Singapore, Portugal, Poland, Philippines, Peru, Pakistan,

Norway, Netherlands, Mexico, Malaysia, South Korea, Japan, Italy, Ireland, Indonesia, India,

Hong Kong, Greece, Germany, France, Finland, Denmark, Czech Republic, Colombia, Chile,

Canada, Brazil, Belgium, Austria, and Australia.

Table 1 reports the number of observations and the average values of

Bank_Accounting_Disclosure by country. The United States has the highest number of

observations (4,480), which is almost 44.60% of the total observations in our sample. India has

the highest mean value of the key variable Bank_Accounting_Disclosure (0.8479). South Africa

has the lowest average value of the variable Bank_Accounting_Disclosure (0.3507).

Pacific Accounting Review 2016.28.

Insert Table 1 about here

Table 2 presents the descriptive statistics in the entire sample. The dependent variable

Bank_Stock_Synchronicity has the mean value -1.6795 and has the standard deviation 1.7181.

The other dependent variable Bank_Crash_Risk has the average value -1.1958 and its standard

deviation is 0.5341. The average value of the key variable Bank_Accounting_Disclosure equals

0.7741 and its standard deviation is 0.1328. The mean values of other independent variables such

as Foreign_Ownership, GDP_Growth_Variance, Log_GDP_Per_Capita, Bank_Size,

Bank_Nonperforming_Loan, and Bank_Earnings_Comovement are equal to 0.2085, 0.0086,

8.9863, 15.0567, 0.0211, and 0.2684 respectively.

Insert Table 1 about here

In our sample, the mean value of VIF equals 2.22 and it suggests that there is no

multicollinearity problems. The p-value of Breusch-Pagan test is equal to 0.21 and it implies that

we cannot reject the null hypothesis that the variance of the residuals is homogenous. The p-

11
 value of Swilk test is very large (0.22), indicating that we cannot reject that the residuals are

normally distributed.

5. Results

Table 3 reports the results of univariate analysis. As shown in the low column, the mean

values of Bank_Stock_Synchronicity and Bank_Crash_Risk in the subsample with banks, which

have lower than median value of the variable Bank_Accounting_Disclosure, are -0.5965 and -

0.9148 respectively. As presented in the high column, the average values of

Bank_Stock_Synchronicity and Bank_Crash_Risk in the subsample with banks, which have

Pacific Accounting Review 2016.28.

higher than median value of the variable Bank_Accounting_Disclosure, are equal to -2.4711 and

-1.4012 respectively. In the last column, the differences between the mean values in these two

subsamples are described and are statistically significant. The results suggest that if a bank has

higher levels of accounting disclosure policies, its stocks experience lower stock return

synchronicity and lower crash risk, which is in line with the hypothesis.

Insert Table 3 about here

To include more control variables, the multivariate analysis is conducted based on

Equation (2) and (3).

Bank_Stock_Synchronicity = α + β1 Bank_Accounting_Disclosure + β2 Foreign_Ownership + β3

GDP_Growth_Variance + β4 Log_GDP_Per_Capita + β5 Bank_Size + β6

Bank_Nonperforming_Loan + β7 Bank_Earnings_Comovement + Country and Year effects + ε

(2)

12
 Bank_Crash_Risk = α + β1 Bank_Accounting_Disclosure + β2 Foreign_Ownership + β3

GDP_Growth_Variance + β4 Log_GDP_Per_Capita + β5 Bank_Size + β6

Bank_Nonperforming_Loan + β7 Bank_Earnings_Comovement + Country and Year effects + ε

(3)

The dependent variables are Bank_Stock_Synchronicity and Bank_Crash_Risk. The key

variable is Bank_Accounting_Disclosure and it is expected to have a significant negative effect

on the dependent variables including Bank_Stock_Synchronicity and Bank_Crash_Risk

Pacific Accounting Review 2016.28.

according to the hypothesis. This paper includes three country-level control variables:

Foreign_Ownership, GDP_Growth_Variance, and Log_GDP_Per_Capita. It is anticipated that

the variable Foreign_Ownership has a negative impact on Bank_Stock_Synchronicity and

Bank_Crash_Risk because foreign ownership may be associated with higher corporate

governance, which increases information content in stock prices and reduces stock crash risk.

The variable GDP_Growth_Variance is expected to have a positive influence on

Bank_Stock_Synchronicity and Bank_Crash_Risk because macroeconomic instability may

dominate firm-specific variations and results in a more risky environment (Jin and Myers, 2006).

It is predicted that the variable Log_GDP_Per_Capita is negatively associated with the two

dependent variables because stocks in the countries with better economic development are less

aligned with the entire market and are less risky (Morck et al., 2000).

This research controls for three bank-level variables. It is expected that the variable

Bank_Size has a positive impact on the dependent variable Bank_Stock_Synchronicity because

the entire economy is more dependent on large banks. Roll (1988) shows that stocks of large

13
 business firms are more synchronized with the market. The financial statements of large banks

are more complicated than small banks because large banks are more likely to have complex

derivatives. Thus, the variable Bank_Size is anticipated to be positively related to the dependent

variable Bank_Crash_Risk. Banks with more nonperforming loans are more risky and external

investors may have less incentive to conduct informed arbitrage. Thus, the variable

Bank_Nonperforming_Loan is predicted to be positively associated with the dependent variables

Bank_Stock_Synchronicity and Bank_Crash_Risk. The variable Bank_Earnings_Comovement is

anticipated to have a positive influence on Bank_Stock_Synchronicity and a negative impact on

Bank_Crash_Risk because banks with higher earnings movement have lower idiosyncratic risk
Pacific Accounting Review 2016.28.

(Morck et al., 2000). In the estimations, country and year fixed effects are included.

The results of the estimations based on Equation (2) and (3) are reported in Tables 4 and

5. In the first column, only the key variable Bank_Accounting_Disclosure is included. In the

second column, the three country-level variables Foreign_Ownership, GDP_Growth_Variance

and Log_GDP_Per_Capita are added. In the third column, the three bank-level variables

Bank_Size, Bank_Nonperforming_Loan, and Bank_Earnings_Comovement are introduced.

As presented in Table 4, the coefficients of the variable Bank_Accounting_Disclosure are

always negative and are statistically significant. The results indicate that if a bank has higher

levels of accounting disclosure policies, its stocks experience lower stock return synchronicity,

which is in line with the hypothesis. These results suggest that if there is not adequate bank

financial statement disclosure, bank-specific information is less available to external investors.

Investors are more likely to depend on market-wide information to trade. Therefore, bank stocks

are more synchronized with the market and include less bank-specific information content

(Veldkamp, 2006).

14
 As shown in Table 5, the coefficients of the variable Bank_Accounting_Disclosure are

always negative and are statistically significant. The results indicate that if a bank has higher

levels of accounting disclosure policies, its stocks experience lower crash risk, which is in line

with the hypothesis. The results imply that if banks do not have enough financial statement

disclosure, it may show that banks withhold a lot of bad information. When the cost of hiding

such negative information accumulates and banks cannot afford it, all the negative information

may be released suddenly. Therefore, bank stocks will be more likely to crash (Jin and Myers,

2006).

The results also show that banks with higher earning comovement have lower stock
Pacific Accounting Review 2016.28.

return synchronicity and higher crash risk. These results suggest that banks with higher earnings

movement have lower idiosyncratic risk (Morck et al., 2000). We also find that banks in the

countries with higher GDP per capita have lower crash risk. These results are consistent with the

findings by Morck et al. (2000). The other control variables are not always statistically

significant.

Insert Table 4 about here

Insert Table 5 about here

The economic significance of the results is also investigated. As presented in the third

column of Table 4, an increase from the 50th to the 90th percentile in the independent variable

Bank_Accounting_Disclosure decreases the dependent variable Bank_Stock_Synchronicity by

25.59% [(0.9000-0.8000)/0.8000*2.0473]. As indicated in the third column of Table 5, an

increase from the 50th to the 90th percentile in the independent variable

Bank_Accounting_Disclosure reduces the dependent variable Bank_Crash_Risk by 34.53%

[(0.9000-0.8000)/0.8000*2.7620]. Thus, the results are economically significant.

15
 In summary, employing data from 37 countries, this research finds that banks’ stocks

experience lower stock return synchronicity and fewer extremely negative returns if banks have

better financial statement disclosure. Our results are consistent with the findings about the

beneficial effects of bank accounting disclosure by the existing literature. Specifically, Nier

(2005) shows that enhanced bank disclosure can increase overall financial stability. Nier and

Baumann (2006) find that better bank annual report disclosure is associated with lower banking

sector risks.

This research also conducts several robustness tests. Specifically, large banks and small

banks may differ in terms of the effects of bank accounting disclosure policies because the
Pacific Accounting Review 2016.28.

government is more likely to bail out large banks (Gandhi and Lustig, 2013). To address this

concern, we divide the sample into four quartiles according to banks’ total assets in each country

year and run the estimations in each quartile. As presented in Tables 6 and 7, the main results

still hold. We also test the differences in the coefficients of Bank_Accounting_Disclosure among

the estimations across the four quartiles. The results show that these differences in the

coefficients of Bank_Accounting_Disclosure are not significant across the subsamples, which

suggests that large banks and small banks do not differ in terms of the effects of bank accounting

disclosure policies.

Insert Table 6 about here

Insert Table 7 about here

In addition, about 44.60% of banks in the sample are U.S. banks, which may affect our

results. To deal with this issue, we run the estimations in the subsample without U.S. banks. As

reported in Table 8, the same conclusion is still obtained. Finally, our stock return synchronicity

measure may be underestimated if the data series contains crash episodes. To address this

16
 problem, we also define an alternative measure of bank stock synchronicity,

Bank_Stock_Synchronicity_1, based on the data without crash events. The conclusions still hold

in the robustness tests, which uses this alternative measure of bank stock synchronicity as shown

in Table 9.

Insert Table 8 about here

Insert Table 9 about here

6. Conclusion

Banks perform important functions of allocating resources to economies around the

Pacific Accounting Review 2016.28.

world, monitoring business firms, and promoting economic growth (see Levine, 2005 for a

survey). However, banks’ financial statements are more difficult to evaluate for outside investors

than business firms because of customized bank loan contacts and complex financial derivatives

(Greenspan, 1996). In addition, the financial crises show that the levels of bank accounting

information disclosure are not enough for public investors, which spurs a debate about how to

improve bank accounting information environment and the safety of the banking industry

(Flannery et al., 2012).

This paper investigates how banks’ accounting disclosure policies affect information

content in stock prices and stock crash risk. Employing data from 37 countries, this research

finds that banks’ stocks experience lower stock return synchronicity and fewer extremely

negative returns if banks have better financial statement disclosure. These results suggest that

banks’ stocks have higher information content and lower crash risk if banks’ information

environments are more transparent. Our results are in line with the findings about the beneficial

effects of bank accounting disclosure by the previous literature. In particular, Nier (2005)

17
 demonstrates that enhanced bank disclosure can increase overall financial stability. Nier and

Baumann (2006) find that better bank annual report disclosure is associated with lower banking

sector risks.

This study also has policy implications. Specifically, it is essential for regulators to

understand the influences of accounting disclosure on information content in bank stock prices.

Bank regulators learn from bank stock price signals (e.g. Flannery, 1998) and they are more and

more interested to employ market-related indicators to supplement their supervision of the

banking industry (Greenspan, 2001). The extant literature (e.g., Chen et al., 2006, Durnev et al.,

2004; Durnev et al., 2003; Wurgler, 2000) demonstrates that firms with lower stock return
Pacific Accounting Review 2016.28.

synchronicity have more transparent information environments and higher investment efficiency.

Thus, this paper finds that higher levels of bank accounting disclosure are associated with lower

stock return synchronicity, which further reduces banks’ opacity and increases banks’ investment

efficiency.

In addition, this research provides new insight about how to reduce banks’ opacity and

improve the safety of the banking industry, which can benefit economic growth. To increase

banks’ transparency and reduce the possibility of extremely negative stock returns, one way to

regulate banks is to increase their accounting disclosure. Finally, this research shows that higher

bank accounting disclosure is associated with less likelihood of extremely negative stock returns.

Future research may look at the effects of accounting disclosure on bank failure to see how much

disclosure is needed for the safety of banks.

18
 Appendix A. the Definitions of Bank_Accounting_Disclosure

This study follows Nier and Baumann (2006) to define the variable

Bank_Accounting_Disclosure based on the data from the Bankscope database. As mentioned in

Nier and Baumann (2006), “To arrive at the disclosure index we define a number of dimensions

of accounting information which we think can be mapped into indicators of bank risk. A total of

18 subindices are created which reflect whether the bank’s accounts (as presented in Bankscope)

provide any detail on each dimension. The subindices are then aggregated to form a composite

disclosure index. The composite index is defined as

1 ଵ଼
෍ ‫݅ݏ‬
20 ௜ୀଵ
Pacific Accounting Review 2016.28.

where each subindex, si, can be related to one or more sources of risk (interest rate risk, credit

risk, liquidity risk, market risk). We have defined a total of 18 subindices. Rather than ordering

the subindices with respect to the source of risk on which they inform, the definition and

ordering of the subindices follows the presentation in the Bankscope database. Table A.1 lists the

subindices used to construct the composite disclosure score. For all subindices, we assign a 0 if

there is no entry in any of the corresponding categories and a 1 otherwise, except for the capital

subindex. For the latter, we assign a 0 if there is no entry in any of these categories, a 1 if there is

one entry only, a 2 if there are two entries and a 3 if there are three or four entries. Note that

whenever a bank provides information on three of these items, one can infer the fourth.

Providing three items is therefore viewed as informationally equivalent to providing four items.

The maximum attainable score on the sum of the subindices is 20.”

19
 Table A.1
Table A.1 is adapted from Table A.1 in Nier and Baumann (2006) and describes the subindices used to define the variable
Bank_Accounting_Disclosure. The data is from the Bankscope database.

Subindex Categories
Assets
Loans S1: Loans by maturity Sub 3 months, 3–6 months, 6 months–1 year, 1–5 years, 5 years +
S2: Loans by type Loans to Municipalities/Government, Mortgages, HP/Lease, Other Loans
S3: Loans by counterpart Loans to Group Companies, Loans to other Corporate, Loans to Banks
S4: Problem loans Total Problem loans
S5: Problem loans by type Overdue/Restructured/Other non-performing
Other S6: Securities by type (detailed breakdown) Treasury Bills, Other Bills, Bonds, CDs, Equity Investments, Other Investments
earning S7: Securities by type (coarse breakdown) Government Securities, Other Listed Securities, Non-listed Securities
assets S8: Securities by holding purpose Investment Securities, Trading Securities
Liabilities
Deposits S9: Deposits by maturity Demand, Savings, Sub 3 months, 3–6 months, 6 months–1 year, 1–5 years, 5 years +
S10: Deposit by type of customer Banks Deposits, Municipal/Government
Pacific Accounting Review 2016.28.

S11: Money market funding Total Money Market Funding

S12: Long-term funding Convertible Bonds, Mortgage Bonds, Other Bonds, Subordinated Debt, Hybrid Capital
Memo lines
S13: Reserves Loan Loss Reserves (Memo)
S14: Capital Total Capital Ratio, Tier 1 Ratio, Total Capital, Tier 1 Capital
S15: Contingent Liabilities Total Contingent Liabilities
S16: Off-Balance Sheet Items Off-Balance Sheet Items
Income statement
S17: Non-interest Income Net Commission Income, Net Fee Income, Net Trading Income
S18: Loan Loss Provisions Loan Loss Provisions

20
 Appendix B. Variable Definitions

Variable Definitions Sources

A logistic transformed r square, estimated in Equation (1). Higher values of this variable
Bank_Stock_Synchronicity indicate lower information content in stock prices. Datastream database
The frequency difference between negative return outliers and positive return outliers.
Negative return outliers are residual returns from the estimation of Equation (1), which are
less than 1 percentile of the distribution. Positive return outliers are residual returns from the
estimation of Equation (1), which are more than 99 percentile of the distribution. This variable
Bank_Crash_Risk is expressed in percentage. Higher values of this variable indicate higher crash risk. Datastream database
A logistic transformed r square, estimated in Equation (1) based on the data excluding
Bank_Stock_Synchronicity_1 negative return outliers. Datastream database
Bank_Accounting_Disclosure The details can be found in Appendix A. Bankscope database
World Bank Surveys
Foreign_Ownership The percentage of banking system's assets in banks that are 50% or more foreign owned. (Barth et al., 2008, 2012)
World Development
GDP_Growth_Variance The previous four-year variance of a country’s GDP per capita growth. Indicators database
World Development
Log_GDP_Per_Capita The logarithm of a country’s GDP per capita. Indicators database
Bank_Size The logarithm of a bank’s total assets. Bankscope database
Bank_Nonperforming_Loan A bank’s total problem loans scaled by its total assets. Bankscope database
A logistic transformed r square, estimated from a regression of a bank’s return on assets on an
Pacific Accounting Review 2016.28.

aggregate banking industry index of return on assets. The estimation uses 6 most recent annual
Bank_Earnings_Comovement observations. Bankscope database

21
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24
 Table 1. Descriptive Statistics by Country
Table 1 reports number of observations and the average values of Bank_Accounting_Disclosure by Country. The definitions of the variables are
presented in Appendix B.

Country Number. Of Observations Bank_Accounting_Disclosure

Australia 20 0.8000
Austria 44 0.6500
Belgium 44 0.4795
Brazil 205 0.7622
Canada 144 0.7042
Chile 83 0.7500
Colombia 66 0.7576
Czech Republic 12 0.7500
Denmark 641 0.6782
Finland 36 0.7264
France 279 0.7369
Pacific Accounting Review 2016.28.

Germany 159 0.6871

Greece 62 0.6444
Hong Kong 66 0.6955
India 282 0.8479
Indonesia 181 0.7232
Ireland 8 0.6000
Italy 88 0.7489
Japan 1417 0.8110
Korea 175 0.6283
Malaysia 167 0.4760
Mexico 48 0.7177
Netherlands 32 0.3578
Norway 227 0.8011
Pakistan 222 0.7340
Peru 99 0.6823
Philippines 121 0.7591
Poland 106 0.7943
Portugal 31 0.7129
Singapore 10 0.6000
South Africa 73 0.3507
Spain 40 0.7000
Sweden 69 0.7703
Thailand 146 0.7640
Turkey 126 0.7956
United Kingdom 36 0.4417
United States 4480 0.8244

25
 Table 2. Descriptive Statistics in the Entire Sample
Table 2 reports the summary statistics in the entire sample. The definitions of the variables are presented in Appendix B.

Variable Mean Std. Dev. 10th Pctl. 50th Pctl. 90th Pctl.
Bank_Stock_Synchronicity -1.6795 1.7181 -3.0266 -2.3276 1.7170
Bank_Crash_Risk -1.1958 0.5341 -1.7385 -1.2554 -0.5730
Bank_Accounting_Disclosure 0.7741 0.1328 0.6500 0.8000 0.9000
Foreign_Ownership 0.2085 0.2256 0.0347 0.1110 0.5002
GDP_Growth_Variance 0.0086 0.0150 0.0006 0.0025 0.0386
Log_GDP_Per_Capita 8.9863 1.3029 6.9011 9.3208 10.3180
Bank_Size 15.0567 1.9395 12.7370 14.8755 17.6488
Bank_Nonperforming_Loan 0.0211 0.0357 0.0011 0.0067 0.0573
Bank_Earnings_Comovement 0.2684 0.0121 0.2667 0.2703 0.2705
Pacific Accounting Review 2016.28.

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 Table 3. Univariate Analysis
Table 2 reports the univariate analysis. The definitions of the variables are presented in Appendix B. *, **, *** are used to indicate 10%, 5%, and
1% significance levels, respectively.

Bank_Accounting_Disclosure
Variables Low High High-Low
Bank_Stock_Synchronicity -0.5965 -2.4711 -1.8746***
Bank_Crash_Risk -0.9148 -1.4012 -0.4864***
Pacific Accounting Review 2016.28.

27
 Table 4. Bank Accounting Disclosure and Stock Return Synchronicity
The definitions of the variables are presented in Appendix B. P-values are described in parentheses. *, **, *** are used to indicate 10%, 5%, and
1% significance levels, respectively.

Dependent Variable Bank_Stock_Synchronicity

(1) (2) (3)
Bank_Accounting_Disclosure -6.1850*** -5.9579*** -2.0473***
(0.0000) (0.0000) (0.0000)
Foreign_Ownership -48.9017 -26.9862***
(0.1267) (0.0004)
GDP_Growth_Variance -2.5996 0.6475
(0.6377) (0.5868)
Log_GDP_Per_Capita -1.5049 -1.4226***
(0.1507) (0.0000)
Bank_Size 0.1646***
(0.0000)
Bank_Nonperforming_Loan 0.0958
(0.7291)
Pacific Accounting Review 2016.28.

Bank_Earnings_Comovement 11.6500***
(0.0000)
Country and Year effects Yes Yes Yes
Obs 10045 9502 7795
Adjusted R2 0.713 0.726 0.596
Prob. > F 0.000 0.000 0.000

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 Table 5. Bank Accounting Disclosure and Stock Crash Risk
The definitions of the variables are presented in Appendix B. P-values are described in parentheses. *, **, *** are used to indicate 10%, 5%, and
1% significance levels, respectively.

Dependent Variable Bank_Crash_Risk

(1) (2) (3)
Bank_Accounting_Disclosure -2.8169*** -2.8310*** -2.7620***
(0.0000) (0.0000) (0.0000)
Foreign_Ownership -62.3666** -25.2390
(0.0255) (0.2656)
GDP_Growth_Variance -0.0780 -0.3054
(0.9499) (0.8669)
Log_GDP_Per_Capita -1.1744*** -0.7957***
(0.0000) (0.0062)
Bank_Size 0.0122
(0.1086)
Bank_Nonperforming_Loan 0.1865
(0.6787)
Pacific Accounting Review 2016.28.

Bank_Earnings_Comovement -11.1656***
(0.0000)
Country and Year effects Yes Yes Yes
Obs 10045 9502 7795
Adjusted R2 0.569 0.576 0.582
Prob. > F 0.000 0.000 0.000

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 Table 6. The Influence of Bank Accounting Disclosure on Stock Return
Synchronicity in the Subsample Based on Bank Size
In Table 6, we divide the sample into four quartiles according to the variable Bank_Size in each country year and run the estimations in each
quartile. The definitions of the variables are presented in Appendix B. P-values are described in parentheses. *, **, *** are used to indicate 10%,
5%, and 1% significance levels, respectively.

Dependent Variable Bank_Stock_Synchronicity

(1) (2) (3) (4)
The First Quartile The Second Quartile The Third Quartile The Fourth Quartile
Bank_Accounting_Disclosure -2.1343*** -2.0085*** -2.1308*** -1.7666***
(0.0000) (0.0000) (0.0000) (0.0000)
Foreign_Ownership -17.3457 -24.8681 -23.5633 -19.0453*
(0.2309) (0.2359) (0.2513) (0.0534)
GDP_Growth_Variance -4.2981** 3.1126** 1.7450 0.0127
(0.0189) (0.0250) (0.4885) (0.9943)
Log_GDP_Per_Capita -1.4203* -1.2240*** -1.9858*** -0.2604
(0.0528) (0.0071) (0.0000) (0.4730)
Bank_Size -0.0042 0.0728* 0.0861** 0.1234***
Pacific Accounting Review 2016.28.

(0.8720) (0.0713) (0.0123) (0.0000)

Bank_Nonperforming_Loan -0.5307 -0.1977 1.4904** -0.3475
(0.2553) (0.4895) (0.0174) (0.6148)
Bank_Earnings_Comovement 5.9158 6.4515 16.1217** 10.7950***
(0.4811) (0.4059) (0.0154) (0.0000)
Column (1)-Other Column Col (1)- Col (2) Col (1)- Col (3) Col (1)- Col (4)
Test of Difference in the Coefficient -0.1258 -0.0035 -0.3677
of Bank_Accounting_Disclosure (0.4000) (0.1154) (0.2000)
Country and Year effects Yes Yes Yes Yes
Obs 1753 1999 1957 2086
Adjusted R2 0.488 0.528 0.577 0.593
Prob. > F 0.000 0.000 0.000 0.000

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 Table 7. The Influence of Bank Accounting Disclosure on Stock Crash Risk in
the Subsample Based on Bank Size
In Table 7, we divide the sample into four quartiles according to the variable Bank_Size in each country year and run the estimations in each
quartile. The definitions of the variables are presented in Appendix B. P-values are described in parentheses. *, **, *** are used to indicate 10%,
5%, and 1% significance levels, respectively.

Dependent Variable Bank_Crash_Risk

(1) (2) (3) (4)
The First Quartile The Second Quartile The Third Quartile The Fourth Quartile
Bank_Accounting_Disclosure -2.5489*** -2.6427*** -2.7486*** -3.1400***
(0.0000) (0.0000) (0.0000) (0.0000)
Foreign_Ownership -132.9495** -26.0300 33.0704 9.4036
(0.0389) (0.5081) (0.2923) (0.7772)
GDP_Growth_Variance 1.8442 -1.2714 -1.8095 -0.0979
(0.6434) (0.5345) (0.4049) (0.9457)
Log_GDP_Per_Capita -0.1984 -1.9232*** -0.4666 -0.5237
(0.6626) (0.0015) (0.4874) (0.3007)
Pacific Accounting Review 2016.28.

Bank_Size 0.0077 0.1248*** 0.0596** 0.0179

(0.8603) (0.0038) (0.0379) (0.4549)
Bank_Nonperforming_Loan -0.2287 -0.0496 -0.2167 1.3352**
(0.8517) (0.9211) (0.7483) (0.0318)
Bank_Earnings_Comovement 20.1010 -4.7789 -6.7884** -11.7446***
(0.2874) (0.5299) (0.0479) (0.0000)
Column (1)-Other Column Col (1)- Col (2) Col (1)- Col (3) Col (1)- Col (4)
Test of Difference in the Coefficient 0.0938 0.1997 0.5911
of Bank_Accounting_Disclosure (0.4029) (0.0144) (0.3000)
Country and Year effects Yes Yes Yes Yes
Obs 1753 1999 1957 2086
Adjusted R2 0.413 0.523 0.592 0.748
Prob. > F 0.000 0.000 0.000 0.000

31
 Table 8. The Influence of Bank Accounting Disclosure in the Subsample
Excluding U.S. banks
The definitions of the variables are presented in Appendix B. P-values are described in parentheses. *, **, *** are used to indicate 10%, 5%, and
1% significance levels, respectively.

Dependent Variable Bank_Stock_Synchronicity Bank_Crash_Risk

(1) (2)
Bank_Accounting_Disclosure -1.7247*** -2.9113***
(0.0000) (0.0000)
Foreign_Ownership -25.6606*** 4.4887
(0.0002) (0.7898)
GDP_Growth_Variance -0.1547 1.5063
(0.8949) (0.3862)
Log_GDP_Per_Capita -1.1171*** -1.1307***
(0.0000) (0.0000)
Bank_Size 0.1052*** 0.0634***
(0.0000) (0.0000)
Bank_Nonperforming_Loan -0.1352 0.3019
Pacific Accounting Review 2016.28.

(0.6299) (0.4977)
Bank_Earnings_Comovement 9.9836*** 1.6414
(0.0002) (0.5432)
Country and Year effects Yes Yes
Obs 3387 3387
Adjusted R2 0.516 0.432
Prob. > F 0.000 0.000

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 Table 9. The Influence of Bank Accounting Disclosure Using Alternative
Measures of Stock Return Synchronicity
The definitions of the variables are presented in Appendix B. P-values are described in parentheses. *, **, *** are used to indicate 10%, 5%, and
1% significance levels, respectively.

Dependent Variable Bank_Stock_Synchronicity_1

(1) (2) (3)
Bank_Accounting_Disclosure -6.2469*** -6.0175*** -2.0678***
(0.0000) (0.0000) (0.0000)
Foreign_Ownership -49.3907 -27.2561***
(0.1267) (0.0004)
GDP_Growth_Variance -2.6256 0.6540
(0.6377) (0.5868)
Log_GDP_Per_Capita -1.5200 -1.4368***
(0.1507) (0.0000)
Bank_Size 0.1662***
(0.0000)
Bank_Nonperforming_Loan 0.0968
Pacific Accounting Review 2016.28.

(0.7291)
Bank_Earnings_Comovement 11.7665***
(0.0000)
Country and Year effects Yes Yes Yes
Obs 10045 9502 7795
Adjusted R2 0.713 0.726 0.596
Prob. > F 0.000 0.000 0.000

33