AAA Spark Meeting of Regions

Bank Management Guidance

• In Event: Incentives, Cost of Equity, Bank Management Guidance

Abstract

Using management forecasts from 1995 to 2018, we find that relative to nonfinancial firms, banks’ management forecasts are more specific, with longer horizons, more optimistic than analyst forecasts, and more positively biased than realized earnings. In addition, banks are more likely to issue forecasts when they have liquidity shortage and low deposit funding. We further find that management forecasts lead to an increase in systemic risk, and the results are robust to the matched sample difference-in-differences design and instrumental variable analysis. Additional evidence of securities investment similarity and deposit migration supports the hypothesis that management forecasts increase cross-bank contagion through bank correlated risk-taking and depositor coordination. Overall, our findings shed new insights on the externalities of management forecasts on financial stability and provide implications for the design of banking sector’s disclosure regulations.

Authors

• Yi-Chun Chen, City University of Hong Kong

• Yang Wang, The Hong Kong Polytechnic University

• K.C. John Wei, The Hong Kong Polytechnic University

• Qi Wu, The Hong Kong Polytechnic University