The role of information disclosure in financial intermediation with investment risk

Yi Chen; Kai Du

doi:10.1016/j.jfs.2019.100720

The role of information disclosure in financial intermediation with investment risk

Yi Chen
, Kai Du

Accounting

Research output: Contribution to journal › Article › peer-review

12 Scopus citations

Abstract

We study how information disclosure affects financial intermediation when the payoff to the long-term investment is risky. The analysis is based on a business-cycle version of the bank run model wherein a bank provides risk sharing to demand depositors who experience unobservable shocks to their liquidity preferences. The bank pre-commits to the precision of an interim signal regarding the payoff to the long-term investment. We examine the impact of bank disclosure on optimal risk sharing achieved by run-proof, signal-contingent demand-deposit contracts. We show that for utility functions that display non-increasing absolute risk aversion, more informative disclosure improves the ex ante risk sharing provided by financial intermediation.

Original language	English (US)
Article number	100720
Journal	Journal of Financial Stability
Volume	46
DOIs	https://doi.org/10.1016/j.jfs.2019.100720
State	Published - Feb 2020

All Science Journal Classification (ASJC) codes

Finance
Economics, Econometrics and Finance(all)

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10.1016/j.jfs.2019.100720

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title = "The role of information disclosure in financial intermediation with investment risk",

abstract = "We study how information disclosure affects financial intermediation when the payoff to the long-term investment is risky. The analysis is based on a business-cycle version of the bank run model wherein a bank provides risk sharing to demand depositors who experience unobservable shocks to their liquidity preferences. The bank pre-commits to the precision of an interim signal regarding the payoff to the long-term investment. We examine the impact of bank disclosure on optimal risk sharing achieved by run-proof, signal-contingent demand-deposit contracts. We show that for utility functions that display non-increasing absolute risk aversion, more informative disclosure improves the ex ante risk sharing provided by financial intermediation.",

author = "Yi Chen and Kai Du",

note = "Funding Information: We received helpful comments from Iftekhar Hasan (the editor), two anonymous reviewers, Viral Acharya, Rick Antle, Carlos Corona, Keith Crocker, Dan Givoly, Steve Huddart, Bjorn Jorgensen, Jing Li, Pierre Liang, Haresh Sapra, Fenghua Song, Shyam Sunder, Jacob Thomas, Tony Kwasnica, Aleh Tsyvinski, Tsahi Versano, Martin Wu, Biqin Xie, Frank Zhang, and workshop participants at Yale School of Management, Fudan University, Penn State Smeal College of Business, Carnegie Mellon Tepper School of Business, and American Accounting Association Annual Meeting. An earlier version of this paper is based on a chapter of Kai Du's PhD dissertation at Yale University. Financial support from Deloitte Foundation Doctoral Fellowship, Harry and Heesun You Fellowship, Penn State, and Yale is gratefully acknowledged. The Securities and Exchange Commission disclaims responsibility for any private publication or statement of any SEC employee or Commissioner. This paper expresses the authors{\textquoteright} views and does not necessarily reflect those of the Commission, the Commissioners, or members of the staff. Publisher Copyright: {\textcopyright} 2020 Elsevier B.V.",

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doi = "10.1016/j.jfs.2019.100720",

language = "English (US)",

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N2 - We study how information disclosure affects financial intermediation when the payoff to the long-term investment is risky. The analysis is based on a business-cycle version of the bank run model wherein a bank provides risk sharing to demand depositors who experience unobservable shocks to their liquidity preferences. The bank pre-commits to the precision of an interim signal regarding the payoff to the long-term investment. We examine the impact of bank disclosure on optimal risk sharing achieved by run-proof, signal-contingent demand-deposit contracts. We show that for utility functions that display non-increasing absolute risk aversion, more informative disclosure improves the ex ante risk sharing provided by financial intermediation.

AB - We study how information disclosure affects financial intermediation when the payoff to the long-term investment is risky. The analysis is based on a business-cycle version of the bank run model wherein a bank provides risk sharing to demand depositors who experience unobservable shocks to their liquidity preferences. The bank pre-commits to the precision of an interim signal regarding the payoff to the long-term investment. We examine the impact of bank disclosure on optimal risk sharing achieved by run-proof, signal-contingent demand-deposit contracts. We show that for utility functions that display non-increasing absolute risk aversion, more informative disclosure improves the ex ante risk sharing provided by financial intermediation.

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The role of information disclosure in financial intermediation with investment risk

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