Do Declines in Bank Health Affect Borrowers’ Voluntary Disclosures? Evidence from International Propagation of Banking Shocks


  • Accepted by Douglas Skinner. This paper is based on Chapter 3 of my dissertation completed at the University of British Columbia. I thank my committee members: Kin Lo (Chair), Sandra Chamberlain, Russell Lundholm, and Maurice Levi for their support and guidance. I am grateful to an anonymous referee for constructive suggestions that greatly improved the paper. I also thank Ray Ball, Anne Beatty, Mark Bradshaw, Nerissa Brown, Mary Ellen Carter, Qi Chen, Qiang Cheng, Richard Frankel, Bob Holthausen, Amy Hutton, Bill Kinney, Christian Leuz, Miguel Minutti-Meza, Regina Wittenberg Moerman, Verdi Rodrigo, Sugata Roychowdury, Ken Schwartz, Abbie Smith, Joe Weber, Pete Wilson, and workshop participants at Boston College, MIT, the University of British Columbia, the University of Hong Kong, the 2011 AAA meeting, and the 2013 Journal of Accounting Research Conference for helpful comments and discussion. Steven Lacey provided excellent research assistance. I thank the Sauder School of Business at the University of British Columbia, and the Carroll School of Management at Boston College for financial support. An online appendix to this paper can be downloaded at


I examine whether declines in banks’ financial health affect their borrowers’ disclosures. Prior studies indicate that, in relationship lending, banks and borrowers rely on private communication, rather than public disclosures, to resolve information asymmetries. When banking relationships are threatened, borrowers must turn to new funding sources, inducing them to reconsider their disclosure policies. This paper predicts that borrowers, whose banking relationships are threatened by declining bank health, change their public disclosures of forward-looking information. Using the emerging-market financial crises in the late 1990s as shocks to the health of certain U.S. banks, I find that affected banks’ U.S. borrowers increase both the quantity and informativeness of their management forecasts following these shocks compared to borrowers of unaffected banks. The results are similar using conference calls or the length of the Management's Discussion and Analysis section as alternative proxies for voluntary disclosure. Overall, these results provide new insights into the impact of availability of relationship lending on firms’ disclosure choices.