Public Disclosure and Risk-Adjusted Performance - FEDERAL RESERVE BANK of NEW YORK

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Economic Policy Review

Public Disclosure and Risk-Adjusted Performance at Bank Holding Companies

August 2016 Volume 22, Number 1

JEL classification: E58, G21, G32, M41

Author: Beverly Hirtle

This article examines the relationship between the amount of information disclosed by bank holding companies (BHCs) and the BHCs’ subsequent risk-adjusted performance. Using data from the annual reports of BHCs with large trading operations, the author constructs an index that quantifies the BHCs’ public disclosure of forward-looking estimates of market risk exposure in their trading and market-making activities. She 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 whose 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, implying 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 trade-offs, a channel for market discipline that has not been emphasized previously in the literature.

Available only in PDF 30 pages / 1.1 mb
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