Discretionary Disclosure by non-TARP Banks during the Financial Crisis of 2008

Accounting

Further details

We examine the disclosure choice of U.S. banks that opt out of the federal government’s Troubled Asset Relief Program (TARP) during the fourth quarter 2008. The Capital Purchase Program (CPP) element of TARP offered banks the opportunity to issue preferred equity to the federal government, provided that they met certain financial criteria. For those banks that opt out of TARP / CPP, only 45% provide timely disclosures (i.e., prior to 31 December 2008) to the capital market.

This disclosure decision is only marginally associated with equity market uncertainty regarding banks’ shares. The much stronger result is more primal: good news banks disclose their opt out, while bad news banks withhold. This result is not consistent with analytical predictions that full disclosure is likely when several market frictions are absent – which we argue is the case in this setting.