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Competition and voluntary disclosure: evidence from deregulation in the banking industry

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Abstract

We use the relaxation of interstate branching restrictions under the Interstate Banking and Branching Efficiency Act (IBBEA) to examine how increases in competition affect incumbents’ voluntary disclosure choices. States implemented the IBBEA over several years and to varying degrees, allowing us to identify the effect of increased competition on the voluntary disclosure decisions of both public and private banks. We find that increases in competition are associated with an increase in press releases. Overall, press releases become more negative in tone as entry barriers decrease. However, disclosures by public banks and by banks issuing equity become incrementally positive in tone when entry barriers decrease. Thus, the increase in disclosure is consistent with a dominant incentive to deter entry via negative information, which is mitigated by an incentive to communicate positive information to investors.

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Notes

  1. For example, Darrough and Stoughton (1990), Wagenhofer (1990), and Darrough (1993).

  2. Although public banks likely face greater capital market pressures than private banks, private banks do tend to be heavy users of public credit markets through repos and wholesale deposits. Thus, capital market incentives to disclose are also relatively strong for private banks, in comparison to other types of private firms.

  3. See, for example, Goolsbee and Syverson (2008).

  4. De novo branching is the creation of a new branch as opposed to the acquisition of an existing branch.

  5. The only two states that opted out of the provision were Texas and Montana. Both states opted in several years later.

  6. We find little press release activity for banks below this cutoff.

  7. Our panel of bank-years is unbalanced due to banks exiting the sample after mergers and acquisitions or failure. In Section 6, we show that our results are robust to restricting the sample to banks in existence throughout the sample period.

  8. As of 2012, the cost of using PR Newswire to distribute a press release starts at approximately $180 for citywide distribution of a 400 word press release, $740 for national distribution, and $8,000 for worldwide distribution. Business Wire’s pricing grid is similar starting at $295 for citywide, $725 for national, and $8,725 for global distribution. We capture all press releases made by sample banks for citywide, national, or global distribution.

  9. LexisNexis began coverage of PR Newswire in January 1980 and Business Wire in September 1983.

  10. This requirement is based on the structure of LexisNexis data fields.

  11. To identify changes in a bank’s name, we use the history provided on the official website for Federal Reserve bank data (http://www.ffiec.gov/nicpubweb/nicweb/SearchForm.aspx). We focus on cosmetic name changes rather than changes caused by acquisitions. We do not collect press releases after a bank was acquired, because post-acquisition control over disclosure policy likely shifts to the parent.

  12. RavenPack provides real time analysis of press releases and other types of textual data to financial institutions (http://www.ravenpack.com/index.html).

  13. Footer information commonly includes the company’s contact information. For less than one percent of the press releases, the headline or footer is formatted in a nonstandard fashion and thus cannot be identified with our textual analysis program. In these cases we conduct the search on the entire text of the press release, including the header and footer text.

  14. For a description of Diction, see http://www.dictionsoftware.com/. For an application, see Rogers et al. (2011).

  15. A related concern is that IBBEA might also have prompted banks to go public in order to finance their expansion strategies and, as a result, banks increased their voluntary disclosures in preparation for the public offering. This explanation is unlikely because only two banks in our sample switch their ownership status.

  16. We use the SDC Thomson database to identify acquisitions.

  17. Data for commercial banks are taken from the Bank Regulatory database available on WRDS. For commercial banks, the ratio is computed as the ratio of the sum of net income over the past four quarters (RIAD4340) to total assets (RCFD2170). For savings banks and savings institutions, data are taken from the Thrift Financial Report data provided by SNL Financial. For savings banks and savings institutions, the ratio is computed as the ratio of the sum of Net Income attributable to Savings Association (SO91) over the past four quarters to Total Assets (SC60).

  18. In some years, banks in our sample issued zero press releases. We use ordinary least squares because introducing fixed-effects in a Tobit model introduces an incidental parameter problem (Wooldridge 2010).

  19. For banks that are SEC registrants, we use the number of voluntary 8-K filings as an alternative measure of voluntary disclosure and find similar results, but with slightly weaker statistical significance.

  20. Our press release measure is skewed. To address this point, we reestimated our base specifications using the natural logarithm of the press release measures as the dependent variable. For bank-years with zero press releases, we add one before taking the natural logarithm. For this specification, the estimated coefficient on the variable of interest is statistically significant using one-sided tests, and the treatment effects are similar in economic magnitude to those presented in the tables. This specification, however, is problematic due to the artificial nature of adding one before taking the natural logarithm of the dependent and independent variables. To further address this point, we Winsorize the distribution of press releases to the 99th percentile to remove any effects of outliers. Once again, the results are the same as those presented in our main analysis.

  21. In untabulated analysis, we redefine the acquisition variable so that it is equal to one only for acquisitions in which the percentage change in deposits is in the top quartile. We find that the economic magnitude of the coefficient is substantially larger (3.5).

  22. The county is our unit of analysis in this regression because the county level reflects the most direct competition faced by a given bank and reflects the geographic market that the bank is most interested in protecting.

  23. In unreported results, we also find that the tone results are unchanged when we condition on these additional variables. For brevity, we do not include these results in the paper.

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Acknowledgements

This work is supported by the Harry W. Kirchheimer Faculty Research Fund at the University of Chicago Booth School of Business. We are grateful to Stephen Penman (the editor) and an anonymous referee for valuable feedback. We thank Jannis Bischof, Peter Easton, Jack Hughes, Christo Karuna (discussant), Hanna Lee (discussant), Ed Owens, Doug Skinner, Charles Wasley, Jerry Zimmerman, and workshop participants at the University of Rochester, the 2012 FARS Midyear Meeting, and the 2013 Conference on Financial Economics and Accounting for their comments.

Author information

Authors and Affiliations

  1. Mendoza College of Business, University of Notre Dame, 385 Mendoza College of Business, Notre Dame, IN, 46530, USA

    Jeffrey J. Burks

  2. Stern School of Business, New York University, 44 W 4th St, Ste 10-91, New York, NY, 10012, USA

    Christine Cuny

  3. Tuck School of Business, Dartmouth College, 100 Tuck Hall, Hanover, NH, 03755, USA

    Joseph Gerakos

  4. Booth School of Business, University of Chicago, 5807 South Woodlawn Avenue, Chicago, IL, 60637, USA

    João Granja

Authors
  1. Jeffrey J. Burks
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  2. Christine Cuny
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  3. Joseph Gerakos
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  4. João Granja
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Corresponding author

Correspondence to Christine Cuny.

Appendices

Appendix A: Keyword roots for content categories

Forward-looking statements (Earnings-related)

  • If within 200 characters of: earnings, income, loss, losses, profit, profits, EPS.

  • Include: anticipat, belie, earnings guidance, estimate, expect, forecast, forward, future, goal, intend, objective, potential, we’ll, will, won’t.

  • Exclude: william, superintendent, carryforward, futures.

Forward-looking statements (Earnings-unrelated)

  • If NOT within 200 characters of: earnings, income, loss, losses, profit, profits, EPS.

  • Include: anticipat, belie, earnings guidance, estimate, expect, forecast, forward, future, goal, intend, objective, potential, we’ll, will, won’t.

  • Exclude: william, superintendent, carryforward, futures.

Products

  • Include: ad campaign, card, consumer demand, customer demand, debit, demand for, financing, index, joint venture, launch, loan, market share, mortgage, prime rate.

Earnings

  • Include: EPS, delayed, earning, expense, financial highlights, interest income, last year, loss, net income, non-performing, operating income, pretax, quarter, revenue, unearned income, year ago, year-ago, year-end.

  • Exclude: headquarter, internal revenue.

Mergers & acquisitions

  • Include: acqui, discontinue, divest, merge.

  • Exclude: emerge.

Capital structure

  • Include: buyback, dividend, name change, ownership, public offering, redemption, reorg, repurchase, spin off, spin-off, split, stock option, subordinated notes.

  • Exclude: homeownership, home ownership, ownership project, ownership units.

Regulatory

  • Include: regulat.

Labor

  • Include: appoint, compensat, hire, management team, resign.

  • Exclude: berkshire, compensatory, disappoint, Firesign, Hampshire, worker’s compensation.

Appendix B: Examples of disclosures, by content category

Forward-looking statements (Earnings-related)

  • “...equity department responded to our earnings announcement by raising their 1997 and 1998 earnings estimates for MBNA and maintaining their five-star ‘Buy’ (highest rating) recommendation.”

  • “METROPOLITAN FINANCIAL CORPORATION ESTIMATES HIGHER NET INCOME IN FIRST QUARTER”

Forward-looking statements (Earnings-unrelated)

  • “Wachovia Bank Card Services expects to begin operations in Chesapeake in the first quarter of 1998.”

  • “...we want to build on our long-term record of environmental stewardship,” he said. “We’ll all work hard to get this environmental effort right.”

  • “...enhance the relationships we have with our corporate and institutional customers. We’ll be able to offer a variety of sophisticated products to meet their needs.”

  • “...rents have gone up 12-15 percent. We’ll see much more multifamily construction here this year”

  • “We’ll work with you to expedite loan approvals or defer credit card and loan payments.”

  • “Safeway’s research shows that Sunday is its second, or third, busiest day of the week. That’s why we’ll be open on Sundays.”

Products

  • “...for low- and moderate-income neighborhoods and communities in Massachusetts as part of a broader program that will pump more than 500 million in new capital into the New England economy.”

  • “...The Home Ownership Made Easy (HOME) Loan Program offers mortgage financing with flexible lending guidelines and down payment assistance”

  • “With the international travel market picking up, we plan to launch major promotional efforts during the upcoming travel season to link with VISA International’s world...”

  • “...Freddie Mac and California Housing Finance Agency Launch 100 Million No-Down payment Mortgage Pilot Initiative”

  • “freeserve really opened up the Internet market in the U.K., so who better to link up with for the launch of the first marbles(TM) product.”

Earnings

  • “Metropolitan Financial Corporation reports third quarter results”

  • “Household International Reports Highest Quarterly Earnings in Company’s History;– Earnings per share of 0.83, up 32 percent”

Mergers & acquisitions

  • “Old Stone completes agreement to sell Washington retail division to Washington Mutual Savings Bank”

  • “St. Paul Bancorp announces proposed acquisition of Elm financial services”

Capital structure

  • “CHEMICAL BANKING CORPORATION TO REDEEM LONG-TERM DEBT”

  • “This divestiture is a continuing part of a broad strategic restructuring which management instituted in 1994...”

  • “BankAmerica Board Declares Quarterly Dividends, Announces Redemption of Preferred Stock Series A, B”

Regulatory

  • “Harris Bank’s combined capital ratio exceeds the prescribed regulatory minimum for bank holding companies.”

  • “Upon regulatory approval, GECC Financial’s retail deposit accounts will become First Hawaiian Bank accounts.”

Labor

  • “... officer of U.S. Bancorp, announced that Ed Jensen, currently president of U.S. Bancorp, has been appointed chief operating officer of the company. At the same time, Breezley, who is also chairman of U.S....”

  • “...promoting Hagfeldt and Smith and establishing a new role for Hayes, BAS Municipal Finance will be hiring additional analysts, bankers, salespersons and traders to bolster its continued growth and commitme...”

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Burks, J.J., Cuny, C., Gerakos, J. et al. Competition and voluntary disclosure: evidence from deregulation in the banking industry. Rev Account Stud 23, 1471–1511 (2018). https://doi.org/10.1007/s11142-018-9463-1

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