Has Dodd-Frank Discouraged Voluntary Disclosures?

Anya Kleymenova: The Dodd-Frank Act is a very complex piece of legislation. It was passed in July 2010. It contains more than 16 different sections and more than 1,000 different subsections, and it spans over 800 pages. In particular, the Dodd-Frank Act affects financial institutions, as well as publicly listed firms, credit rating agencies, and the regulators themselves. 

What is particularly interesting about the financial sector is that banks that are large in size—called systemically important financial institutions—and these are banks with assets of more than $50 billion—are affected more by the Dodd-Frank Act than other institutions. Large banks that have more than $10 billion in total assets are also affected by an introduction of stress tests. So the Dodd-Frank Act introduced a number of different changes, and some of the sections are still being implemented. 

But what is important is that the financial sector has been affected more by this change than any other. My coauthor, Li Zhang, from Rutgers Business School, and I were interested to understand whether, in this increased-information environment, or increased scrutiny the banks are subject to because of the Dodd-Frank Act, banks will provide more or less information voluntarily. And theoretically, the predictions go both ways. On the one hand, because they’re facing high regulatory scrutiny, banks might start withdrawing or withholding some of the information voluntarily. So they’re going to be less forthcoming about their performance, say, voluntarily, because they’ll be concerned about inviting future regulation or future political risk. 

On the other hand, because banks are facing this uncertainty, they might actually want to provide more information voluntarily to allow capital-market investors, such as analysts and the equity holders to learn more about how regulatory uncertainty might be affecting these banks, and therefore they might provide more information. So a priori, theoretical literature gives us a forecast going in two directions. 

So in particular, in this paper, what we do is we look at two types of voluntary information, or voluntary disclosure, that the banks provide. First we look at the voluntary management forecast. This is a forecast of future performance that management expects the banks to realize. And what we find is that banks that are affected by the Dodd-Frank Act—so these large financial institutions—they start withholding their forecasts and they withhold, in particular, the forecasts about bad news. But if they provide the forecast, the actual quality of information improves. We find that the intensity of information—so how much numerical information they provide, as well as the length of the forecast—is actually better. 

So knowing that, we actually want to understand, “Well, what do banks talk about when they want to provide voluntary information?” So we also look at the conference-call information. So these are the quarterly conference calls with analysts that banks do, public banks do, following the release of their quarterly or annual performance. In particular, we look at two sections of the conference calls. The first one is the prepared remarks: this is when management goes through and explains the performance for the quarter or the year, and maybe addresses some big issues the bank faces. 

The second part is the more voluntary part, where analysts actually get a chance to ask management questions, and management responds. We separate those two parts of the conference call and we look at what happens following the Dodd-Frank Act for banks that are specifically affected—so the large financial institutions subject to increased regulatory scrutiny. 

We find that these banks actually start providing more information, either in the prepared remarks or in the question-answer section about their future performance, and more interestingly, about their regulatory exposure. And then we also try to see cross-sectionally if banks are more concerned about regulatory scrutiny. Do they talk more to analysts about regulation? And in fact, they do. They provide more information about the regulatory uncertainty, and the analysts also asked more about regulatory uncertainty. 

What is also interesting is that management, on the other hand, speaks less about unregulated sectors, or things that are not subject to future oversight. So thinking back about the predictions that I laid out, we find that following this huge change in regulation, banks that are specifically affected by it actually respond to regulation by providing more information and specifically addressing the concerns about regulatory uncertainty rather than withholding information from analysts and the capital market. 

In this presence of regulatory change, in particular, some massive legislation such as the Dodd-Frank Act, what we observe is that banks, instead of withholding information if they’re affected by the regulation, they actually want to signal their type. They want to show that they’re a good bank, and provide more information, be more forthcoming about the effects of regulation on their future performance and their past performance. So they provide more information to the analysts, as well as the capital market, and they provide better-quality information. 

But the one thing that they don’t provide, is, actually, they withdraw information when they do have poor performance. So there’s still some concern about future regulation, but overall what we find is that banks actually are more forthcoming. They voluntarily provide more information. Their information environment is actually enriched following the change in the Dodd-Frank Act. 

So where do we go from now? Well, of course, the Dodd-Frank Act is a very complex piece of legislation, and we’re only looking at a small piece of the puzzle. But what we do understand is that following something as complex as the Dodd-Frank Act, we actually observe that banks voluntarily want to provide information. And the more affected they are, the more information they provide. 

And of course, in 2018, the Dodd-Frank Act has changed, certain provisions under the Dodd-Frank Act have been rolled back. In particular, what is affecting our study is that banks now subject to increased regulatory scrutiny are no longer above the $50 billion threshold, but now above the $250 billion threshold. So what we learned from our study speaks to a much larger set of banks, and it’s a bit too early to say what will happen after 2018, whether banks will start withdrawing information or if they will continue providing additional voluntary information, even though they’re no longer affected by this increased regulatory oversight.