The Federal Reserve Bank of New York works to promote sound and well-functioning financial systems and markets through its provision of industry and payment services, advancement of infrastructure reform in key markets and training and educational support to international institutions.
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This paper examines the relationship between the amount of information disclosed by bank holding companies (BHCs) and their subsequent risk-adjusted 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 subsequent risk-adjusted returns in the BHCs’ trading activities and for the firm overall. The key finding is that more disclosure is associated with higher risk-adjusted returns. This result is strongest for BHCs where trading represents a large share of overall firm activity. More disclosure does not appear to be associated with higher risk-adjusted performance during the financial crisis, however, suggesting that the findings are a “business as usual” phenomenon. These findings suggest that greater disclosure is associated with more efficient risk-taking and thus improved risk-return tradeoffs, a channel for market discipline that has not been emphasized previously in the literature.