Did Information Intermediaries See the Warning Signals of the Banking Crisis from Leading Indicators in Banks’ Financial Statements?
We investigate whether the observable actions of four information intermediaries (short sellers, credit rating agency, sell-side analysts, and auditors) in the months prior to the 2008 banking crisis were sensitive to the leading indicators of bank distress constructed from the banks’ publicly-available financial statements. We find that the mean level of short interest in our sample of banks increased steadily from 0.66% at the end of 2002 to 4.0% at the end of 2007. However, we observe little meaningful change in the mean credit rating, mean analysts’ recommendation and mean audit fees over this period. Further analysis reveals that the level of short interest in particular and analysts’ stock recommendations to some extent, exhibit a much stronger association with the leading financial statement based indicators of bank distress over the period 2005-2007 relative to an earlier period of 2002-2004. Unlike short sellers and analysts, the rating actions of a credit rating agency (S&P) and auditors’ fees do not appear to be sensitive to the warning signals of the crisis from the financial statements.
Accounting | Business
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