The 2010 Dodd-Frank Act is designed to prevent a repeat of the banking meltdown and the 2008–09 financial crisis. One of its goals is to make banks, and especially large banks, more transparent about their financial health. However, has it discouraged banks from providing additional information voluntarily?

Chicago Booth’s Anya Kleymenova and Rutgers’s Li Zhang find that while in some respects Dodd-Frank has improved voluntary reporting, it also discouraged banks from willingly disclosing bad news.

Dodd-Frank’s disclosure guidelines—voluntary or mandated, depending on a bank’s size—aim to increase the transparency of large and “systemically important financial institutions,” including banks and bank holding companies with consolidated assets of more than $10 billion. The researchers examined whether large banks, after the law went into effect, provided fewer voluntary disclosures relative to other banks and unregulated firms in the financial sector.

Using a difference-in-differences research design, a statistical technique that compares a treatment group to a control group, they find that large banks became less likely to issue earnings forecasts containing bad news.

Line of Inquiry: Has Dodd-Frank discouraged voluntary disclosures?

However, using information from quarterly conference calls with financial analysts, they also document that managers of large banks devoted a higher proportion of conference calls to numerical information and forward-looking content, in both the prepared remarks and their answers to questions. Also, in response to analysts’ demand for more information, large banks increased their discussion of financial performance (mainly related to commercial banking) and estimates of future performance. These effects seem to be stronger when there is more regulation-related discussion during conference calls.

The researchers analyzed data from multiple sources—including conference-call transcripts from financial data company FactSet (they used a machine-learning technique to capture the information content of the calls), and quarterly regulatory filings from the Federal Reserve Bank of Chicago—for much of the period between 2006 and 2014. The 2006–09 period was pre-Dodd-Frank, and 2011–14 represented post-Dodd-Frank. The researchers excluded data from the year of enactment, 2010.

Prior research by Kleymenova, among others, indicates that banks may reduce risky behavior in response to the enhanced oversight and reporting requirements of Dodd-Frank and other legislation. But the resulting behavioral changes in reporting by some banks illustrates the unintended consequences that can result from regulating companies’ information environments.

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