Essays on Bank Opaqueness

Opaqueness is inherent to financial institutions but contributes to the fragility of the banking system. The archetypal assets held by banks, loans, have a value that cannot be properly communicated outside of a banking relationship (Sharpe 1990; Rajan 1992). Because they are relationship specific and raise adverse selection concerns, these assets are illiquid (Diamond and Rajan 2001). However, these assets are financed with liquid deposits; uncertainty about their value can cause depositors to withdraw their funds and banks to topple (Calomiris and Kahn 1991; Chen 1999). Additionally, the combination of opaqueness and leverage creates moral hazard incentives, exacerbated by government guarantees, as well as other agency conflicts that are detrimental to stability (Jensen and Meckling 1976).This dissertation presents three original contributions on the consequences of bank opaqueness. The first contribution concerns financial analysts. We show that, unlike in other industries, the most talented sell-side analysts are no more likely than their peers to issue recommendation revisions that influence bank stock prices. However, star analysts appear to maintain influence by uncovering firm-specific bad news that induces sharp negative revaluations of bank stock prices. In the second contribution, we find that the persistence of bank dividend policies increases with agency conflicts between shareholders and managers and decreases in the presence of large institutional shareholders who have an incentive to monitor banks and to mitigate agency conflicts. Our third contribution assesses the competitive distortions in bond markets since the recent reforms of the European Union bank safety net. We find that nationalized systemic banks, and those that benefit from high bailout expectations, do not benefit from funding advantages compared to their peers. Our findings also suggest that bailout expectations for these banks have diminished, consistent with new regulatory frameworks enacted after the financial crisis being effective.Overall, our findings suggest that opaqueness presents formidable challenges for public authorities but that its consequences can be mitigated by credible regulation.