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How do depositors respond to banks' discretionary behaviors? Evidence from market discipline, deposit insurance, and scale effects

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  • Tran, Dung Viet
  • Hussain, Nazim
  • Nguyen, Duc Khuong
  • Nguyen, Trung Duc

Abstract

We investigate how depositors respond to the U.S. bank's discretionary behaviors. We document higher deposit rates for banks that engage more in earnings management, suggesting evidence of market discipline. The quantile regressions, which dissect bank behavior at the right tail of deposit costs distribution, point out that the leveraged effect of earnings management is more significant in low- and high-deposit costs banks. Additionally, we note that depositors monitor banks' discretionary behavior to a greater extent before and during the crisis; however, they become less severe after the crisis. Interestingly, there is strong evidence of depositors monitoring large banks before, during, and after the crisis, suggesting the “too-big-to-fail” perception does not hold for our sample. The study also documents evidence of monitoring by insured and uninsured depositors over the sample period. After the crisis, we find a “wake-up call” for uninsured depositors, and more importantly, insured depositors remain sensitive to banks' reporting quality despite a weakening of incentives due to the increase of deposit insurance limit. The evidence is crucial when confirming that a deposit insurance scheme does not completely remove the deposit discipline. Our findings are useful for regulators and policymakers concerned about strengthening the market discipline.

Suggested Citation

  • Tran, Dung Viet & Hussain, Nazim & Nguyen, Duc Khuong & Nguyen, Trung Duc, 2024. "How do depositors respond to banks' discretionary behaviors? Evidence from market discipline, deposit insurance, and scale effects," International Review of Financial Analysis, Elsevier, vol. 93(C).
  • Handle: RePEc:eee:finana:v:93:y:2024:i:c:s1057521924001376
    DOI: 10.1016/j.irfa.2024.103205
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    More about this item

    Keywords

    Bank earnings management; Reporting quality; Market discipline; Deposit rates; Deposit insurance;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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