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The Impact of Banking Regulation on Voluntary Disclosures

Firms disclose a variety of information to the public, some because they are required to do so by law or regulations, and others voluntarily because they want, for example, to signal their creditworthiness to potential investors. The level and effectiveness of financial institutions’ regulatory oversight have been widely debated since the onset of the financial crisis of 2007-2009. Financial and banking regulators have responded by increasing regulatory requirements and oversight, and by mandating greater disclosure of information. However, these actions do not necessarily improve the information environment of firms if they discourage voluntary disclosures of other types of information. In our paper, we investigate whether enhanced regulatory oversight and mandatory disclosure requirements affect regulated banks’ voluntary disclosures (Beyer et al. 2010). In particular, we take advantage of the artificial size-thresholds imposed by the Dodd-Frank Wall Street Reform and Customer Protection Act of 2010 (DFA) to identify large banks that are directly affected by increased mandatory disclosure and heightened regulatory oversight and compare them with unaffected banks and financial institutions that are not subject to banking regulations.

The DFA was signed into law by President Obama on July 21, 2010. It is a complex piece of legislature with more than 1,500 sections and 848 pages.[1] Its provisions affect financial institutions and other public firms, credit agencies, and regulators. One of the aims of the DFA is to reduce the risks posed by “systemically important financial institutions” (SIFIs), defined by the DFA as banks with total assets of more than $50 billion. Banks with assets between $10 billion and $50 billion are required to conduct and report internal stress tests, as are banks with total assets of $50 billion or more. Banking regulators also reserve the right to impose additional regulatory restrictions and disclosure requirements on banks that fall below the $50 billion threshold if regulators deem them to be risky or systemically important. In our study, we define banks that are directly affected by the DFA to include SIFIs and large banks that fall below the threshold but have total consolidated assets above $10 billion.

We focus on the impact of the DFA on banks’ voluntary disclosure, which, though not explicitly addressed by the DFA, is an important component of firms’ information environments and disclosure practices (Beyer et al. 2010). Theoretical predictions in this setting potentially go in opposite directions. Since the DFA increases disclosure requirements for large banks, these banks might decide to signal their characteristics by providing additional voluntary disclosures and thus distinguish themselves from other banks (i.e., maintain a separating equilibrium). For example, the DFA requires orderly resolution of failed banks and prohibits bank bailouts (potentially eliminating the implicit too-big-to-fail guarantees). Hence, large banks might want to signal to their investors and funding providers that they are stable, responsible banks with a low likelihood of default (Balasubramnian and Cyree 2014). Given the heightened mandatory disclosure expectations, large banks might also devote more resources to financial reporting and hence be more likely to provide higher quality voluntary disclosures (Ball et al. 2012). However, commitment to disclosure might be costly as banks might change their behavior ex ante to avoid the impact of the disclosure ex post and, therefore, limiting market participants’ ability to rely on disclosed information and to impose market discipline (Bond et al. 2012; Mehran 2010; Morris and Shin 2002; Goldstein and Sapra 2013). Large banks might also be reluctant to provide voluntary disclosures that might invite more regulatory oversight (Armstrong et al. 2016). Thus, theory does not give an unequivocal answer to whether SIFIs and other large banks would increase or decrease voluntary disclosures following the imposition of the DFA.

In our study, we investigate the impact of the DFA on voluntary disclosure using two sets of proxies: management forecasts and the content of management’s quarterly conference calls with analysts. Using a difference-in-differences research design, we find that following the introduction of the DFA, large banks become less likely to issue earnings forecasts containing bad news. They also reduce the frequency of earnings forecasts but increase the rate of forecasts for dividends and return on assets. We also apply textual analysis, including Latent Direlicht Allocation (LDA) topic modeling, to provide the first evidence of how the content of banks’ conference calls changed around the DFA. LDA identifies specific topics that managers present to analysts in the scripted management presentation portion of the conference call and the additional information managers provide in the Q&A portion. We think of the former as the supply of information by management and the latter as management’s response to the demand for information from analysts.

We find that, following the introduction of the DFA, affected banks increase the quality of the information provided (measured as numerical intensity, financial information intensity, and forward-looking information intensity) in the presentation section of the conference call incrementally more than do the benchmark firms. Analysts also appear to demand more information in the Q&A section of conference calls, and managers continue to provide more informative answers to analysts of affected banks. We also find that even though affected large banks reduce their disclosure of the estimates of future performance in the presentation section of the conference call, they provide more discussion about future performance in response to analysts’ requests for more information during the Q&A. The affected banks also increase their discussion of commercial banking financial performance but decrease their discussion of investment banking financial performance, loan portfolio and provisions, and securitization incrementally more than o the benchmark firms. These findings suggest that, since the DFA increased regulatory oversight, affected banks are less likely to provide additional voluntary information related to strictly regulated activities.

Overall, we are the first to document the impact of the increased mandatory disclosure requirements and regulatory oversight on various aspects of affected banks’ voluntary disclosures since the introduction of the DFA. The evidence documented in our paper is largely consistent with the finding in Ball et al. (2012) that increased mandatory disclosure leads to more and higher quality voluntary disclosures. On the other hand, to avoid further regulatory oversight, large banks decrease voluntary disclosure along certain dimensions of financial performance, such as earnings per share forecasts and discussion of regulated activities. Our findings contribute to the debate about the DFA’s impact on the information environment of financial institutions. Our results also suggest that rolling back the DFA might have a negative impact on large banks’ information environment by decreasing not only mandatory but also voluntary disclosures.


Armstrong, C., Guay, W.R., Mehran, H., and Weber, J., 2016. The role of financial reporting and transparency in corporate governance. FRBNY Economic Policy Review, 22(1), pp. 107-128.

Ball, R., Jayaraman, S., and Shivakumar, L., 2012. Audited financial reporting and voluntary disclosure as complements: A test of the confirmation hypothesis. Journal of Accounting and Economics, 53(1), pp. 136-166.

Balasubramnian, B., and Cyree, K. B., 2014. Has market discipline on banks improved after the Dodd-Frank Act? Journal of Banking and Finance, 41(April), pp. 155–166.

Beyer, A., Cohen, D.A., Lys, T.Z., and Walther, B.R., 2010. The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics, 50(2-3), pp. 296–343.

Bond, P., Edmans, A., and Goldstein, I., 2012. The real effects of financial markets. Annual Review of Financial Economics, 4, pp. 339-360.

Goldstein, I., and Sapra, H., 2013. Should banks’ stress test results be disclosed? An analysis of the costs and benefits. Foundations and Trends in Finance, 8(1), pp. 1-54.

Mehran, H., 2010. The effect of disclosure on information production by analysts. Working paper, Federal Reserve Bank of New York.

Morris, S., and Shin, H.S., 2002. Social value of public information. American Economic Review, 92(5), pp. 1521-1534.


[1] “The Dodd-Frank Wall Street Reform and Consumer Protection Act,” Pub.L 111-203, H.R. 4173, July 21, 2010.

This post comes to us from professors Anya Kleymenova at the University of Chicago’s Booth School of Business and Li Zhang at Rutgers University. It is based on their recent article, “The Impact of Banking Regulation on Voluntary Disclosures: Evidence from the Dodd-Frank Act,” available here.

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