Bank profit warnings and signaling

Bank profit warnings and signaling Bank profit warnings represent a milder form of negative news than a bank failure. Yet, they may contain signals about a bank or its rivals because the information is transmitted when the bank believes that the market is overly optimistic about its future earnings. Thus, the profit warning serves as a means by which insiders of the bank can reduce the asymmetric information between the bank’s insiders and its investors. We find that banks experience negative valuation effects in response to their profit warnings. The banks’ profit warnings result in significant negative valuation effects for its corresponding rival banks, which implies that the warning carries valuable information about banking industry conditions. However, the effects on rivals are attenuated since the passage of Regulation Fair Disclosure (RFD). This implies that investors may be relying on more transparent sources of information about individual banks rather than relying on one bank’s warning as a signal about other banks. Furthermore, bank regulations may allow for more transparent communication by banks than that of nonbank firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Bank profit warnings and signaling

Managerial Finance, Volume 30 (9): 12 – Sep 1, 2004

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Publisher
Emerald Publishing
Copyright
Copyright © 2004 Emerald Group Publishing Limited. All rights reserved.
ISSN
0307-4358
DOI
10.1108/03074350410769254
Publisher site
See Article on Publisher Site

Abstract

Bank profit warnings represent a milder form of negative news than a bank failure. Yet, they may contain signals about a bank or its rivals because the information is transmitted when the bank believes that the market is overly optimistic about its future earnings. Thus, the profit warning serves as a means by which insiders of the bank can reduce the asymmetric information between the bank’s insiders and its investors. We find that banks experience negative valuation effects in response to their profit warnings. The banks’ profit warnings result in significant negative valuation effects for its corresponding rival banks, which implies that the warning carries valuable information about banking industry conditions. However, the effects on rivals are attenuated since the passage of Regulation Fair Disclosure (RFD). This implies that investors may be relying on more transparent sources of information about individual banks rather than relying on one bank’s warning as a signal about other banks. Furthermore, bank regulations may allow for more transparent communication by banks than that of nonbank firms.

Journal

Managerial FinanceEmerald Publishing

Published: Sep 1, 2004

Keywords: Bank profit warnings; Bank signaling

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