Economic Consequences of Bank Disclosure in the Financial Statements Before and During the Financial Crisis

Abstract

This study examines whether bank risk disclosures are associated with operating performance and market valuation. Due to the inherent opaqueness of banking operations, regulators require increased risk disclosures to facilitate proper monitoring. However, the question of whether these increased disclosures reflect on performance and market value remains open in emerging markets. We measure bank operating performance using a balanced scorecard approach and find that higher risk disclosure is associated with higher operating performance and market valuation in a sample of Egyptian banks. Banks moving from the lowest to the highest risk disclosure deciles increase their risk-adjusted rate of return and market valuation roughly by 3.53 percentage points and by 0.068 basis points, respectively. That is, banks that are accustomed to providing relatively high level of risk disclosures “internalize” the performance lessons more fully and market participants value these increased disclosures. The setting is especially relevant to the study because it involves an emerging economy where banks have high-risk exposure due to global and local events that increased business uncertainties.