Essays in banking and household finance

Abstract

This thesis consists of three essays on banking and household finance. The first chapter examines the relationship between banks' role as liquidity providers and opacity in financial reporting, measured with discretionary loan loss provisions. I investigate the 2007 financial crisis, when unexpected credit line drawdowns generated difficulties in liquidity provision for banks with large amounts of pre-crisis unused commitments. I find that such banks increased financial reporting opacity relatively more after the onset of the crisis. The results are consistent with the theoretical literature that highlights the benefit of bank opacity in providing liquidity during distress.

The second chapter explores the relationship between managers' labor mobility and the financial reporting quality of banks. Using the state-level adoption of the Inevitable Disclosure Doctrine (IDD) as an exogenous shock discouraging labor mobility, we show that adoption of the IDD is associated with a decline in financial reporting quality, as measured by discretionary loan loss provisions. The effect is larger for banks with managers who have limited outside job opportunities and smaller for banks with tight regulatory oversight. Our results support the view from the career concern hypothesis that bank managers facing restrictions on mobility have greater incentives to engage in discretionary accounting.

In the last chapter, I examine how trade secrets protection, in the form of a restriction on labor mobility, affects households' investment in stocks. The protection of trade secrets may influence firms' and employees' investment in human capital, leading to a change in the prospects of the employees' future earnings and job stability. If individuals hedge against human capital risk in the financial market, they would adjust their investment portfolio in response to a legal change in trade secrets protection. This paper empirically tests this hypothesis using the adoption and rejection of the Inevitable Disclosure Doctrine (IDD). I find that households curb financial risk-taking, by tilting their portfolio away from stocks, in states rejecting the IDD. The results resonate with previous literature highlighting the effect of labor market events on asset pricing.