Publication Type

Journal Article

Version

submittedVersion

Publication Date

4-2022

Abstract

The distribution of power in the political system shapes the financial reporting opacity of banks. Specifically, banks located in states with senators on the Senate Banking Committee (BC senators) have greater abnormal loan loss provisions than banks in other states. The result is stronger for larger banks and banks with higher risk. In addition, BC senators have a negative effect on the likelihood of banks in their home states receiving enforcement actions, and, more importantly, this effect is stronger for more opaque banks. These findings suggest that politicians, regulators, and banks use opaque financial reporting to facilitate regulatory forbearance. Moreover, we show that opacity is a significant channel through which BC senators increase bank risk. During economic downturns, however, BC senators appear to promote bank opacity to encourage bank lending and create liquidity. Finally, the capital market does not penalize the reporting opacity of banks in states with BC senators.

Keywords

Bank opacity, politicians, loan loss provisions, regulatory forbearance, real effects, market discipline

Discipline

Accounting | Finance and Financial Management

Research Areas

Corporate Reporting and Disclosure

Publication

Journal of Accounting and Economics

Volume

73

Issue

2-3

First Page

1

Last Page

26

ISSN

0165-4101

Identifier

10.1016/j.jacceco.2021.101452

Publisher

Elsevier

Embargo Period

9-14-2021

Copyright Owner and License

Authors

Additional URL

https://doi.org/10.1016/j.jacceco.2021.101452

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