The Effects of Big Baths on Bank Opacity

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Information asymmetry in the banking sector is important to regulators, analysts, and investors. We examine the change in the information environments of banks following large nonrecurring write‐downs (baths) and find a reduction in information asymmetry in the three years following a bath. This result is conditional on the type of asset being written down. Loan‐related baths result in a permanent decrease in information asymmetry, but merger‐related baths are associated with a transitory increase in information asymmetry. Conversely, baths not related to either loans or mergers result in increased opacity. Consistent with a permanent decrease in information asymmetry, we find an increase in earnings responsiveness in the three years following loan‐related baths.

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Haggard, K. Stephen, John S. Howe, and Andrew A. Lynch. "The Effects Of Big Baths On Bank Opacity." Journal of Financial Research 40, no. 4 (2017): 433-454.

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