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Financial Distress And Banks'communication Policy In Crisis Times

Author

Listed:
  • Besancenot, Damien

    (CEPN and University of Paris 13. Paris, France)

  • Vrânceanu, Radu

    (ESSEC Business School, PB 50105, 95021 Cergy, France)

Abstract

This paper analyzes banks’ communication policies in crisis times and the role of imperfect information in enhancing banks' financial distress. If banks differ in their exposure to dubious assets, fragile banks may claim to be sound only in order to manipulate investors' expectations. Then sound banks must pay a larger interest rate than in a perfect information set-up. A stronger sanction for false information would improve the situation of the low-risk banks but would deteriorate the situation of the high-risk banks. The total effect on the economy-wide frequency of default of credit institutions is ambiguous. It can be shown that, in some cases, the optimal sanction is lower than the sanction that rules out any manipulatory behavior.

Suggested Citation

  • Besancenot, Damien & Vrânceanu, Radu, 2010. "Financial Distress And Banks'communication Policy In Crisis Times," Journal for Economic Forecasting, Institute for Economic Forecasting, vol. 0(1), pages 5-20, March.
    • Handle: RePEc:rjr:romjef:v::y:2010:i:1:p:5-20
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    References listed on IDEAS

    as
    1. Besancenot, Damien & Vranceanu, Radu, 2005. "Socially Efficient Managerial Dishonesty," ESSEC Working Papers DR 05005, ESSEC Research Center, ESSEC Business School.
    2. Tito Cordella & Eduardo Levy Yeyati, 1998. "Public Disclosure and Bank Failures," IMF Staff Papers, Palgrave Macmillan, vol. 45(1), pages 110-131, March.
    3. Diamond, Douglas W & Verrecchia, Robert E, 1991. "Disclosure, Liquidity, and the Cost of Capital," Journal of Finance, American Finance Association, vol. 46(4), pages 1325-1359, September.
    4. Jean-Charles Rochet & Jean Tirole, 1996. "Interbank lending and systemic risk," Proceedings, Board of Governors of the Federal Reserve System (U.S.), pages 733-765.
    5. Bushman, RM & Gigler, F & Indjejikian, RJ, 1996. "A model of two-tiered financial reporting," Journal of Accounting Research, Wiley Blackwell, vol. 34, pages 51-74.
    6. Claudio Borio, 2008. "The financial turmoil of 2007-?: a preliminary assessment and some policy considerations," BIS Working Papers 251, Bank for International Settlements.
    7. Baiman, S & Verrecchia, RE, 1996. "The relation among capital markets, financial disclosure, production efficiency, and insider trading," Journal of Accounting Research, Wiley Blackwell, vol. 34(1), pages 1-22.
    8. Altman, Edward I, 1984. "A Further Empirical Investigation of the Bankruptcy Cost Question," Journal of Finance, American Finance Association, vol. 39(4), pages 1067-1089, September.
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    Cited by:

    1. Radu Vranceanu, 2009. "Four Myths and a Financial Crisis," Post-Print hal-00554704, HAL.

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    More about this item

    Keywords

    financial distress; financial crisis; banks; disclosure; transparency;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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