Bank Transparency and the Market’s Perception of Bank Risk

Jinyong Kim, Mingook Kim, Yongsik Kim

Research output: Contribution to journalArticlepeer-review

9 Scopus citations

Abstract

We investigate the effect of bank transparency on systematic and idiosyncratic risk in the stock market. Using the extent of individual banks’ timely recognition of expected loan losses and the amount of discretionary loan loss provisions as proxies for bank transparency, we find that more transparent banks are associated with lower idiosyncratic, and total, stock market risk. We also find that banks that use more discretionary loan loss provisions are associated with a lower ratio of systematic to idiosyncratic risk. In addition, the effect of bank transparency on stock market risk is mainly observed during the financial crisis period. Our results are robust to alternative transparency measures, the possibility of a non-linear relationship, and application of a dimensionality reduction procedure, and offer empirical evidence that providing more bank-specific information about loan portfolio risk mitigates uncertainty about a bank’s future events.

Original languageEnglish
Pages (from-to)115-142
Number of pages28
JournalJournal of Financial Services Research
Volume58
Issue number2-3
DOIs
StatePublished - 1 Dec 2020

Keywords

  • Bank transparency
  • Loan loss provisions
  • Stock market risk

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