Affiliation:
1. Department of Accounting and Finance, School of Business Athens University of Economics and Business 76, Patission Str. GR‐10434 Athens Greece
2. Essex Business School University of Essex Wivenhoe Park Colchester CO4 3SQ UK
3. Department of Informatics, School of Information Sciences and Technology Athens University of Economics and Business, 76, Patission Str. GR‐10434 Athens Greece
Abstract
AbstractWe examine the association between loan portfolio concentration, competition and stock price crash risk in the US banking industry. We find that during economic downturns, banks with poorly diversified loan portfolios that operate in competitive markets are more likely to crash. Importantly, we show that this link is channelled through aggressive earnings management and ambiguous annual reports. Therefore, managerial ambiguity can serve as an early warning signal of information obfuscation, which can eventually lead to stock price crashes. As a quasi‐natural experiment, we use the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act in 2018. This policy lowered the regulatory requirements and oversight for a specific group of large banks. The results of a difference‐in‐differences analysis support our baseline findings and add to the ongoing debate on the roots of the 2023 banking crisis. Therefore, our findings can be informative to market participants, regulators and policy makers.