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Bank Competition and Opacity

Nov 09, 2015

Liangliang Jiang, Ross Levine, Chen Lin

Publisher: Milken Institute

When banks manipulate financial statements to smooth earnings, circumvent capital requirements, and reduce taxes, investors are unable to accurately evaluate their performance. Bank opacity impedes sound governance and also hampers regulators’ ability to ensure the safety and soundness of the banking system. As shown by Beatty and Liao (2011), Bushman and Williams (2012), and Huizinga and Laeven (2012), managed financial statements reduce bank stability, impair efficiency, and lower the quality of loan portfolios.