Role of accounting information in understanding the behavior of financial institutions

This thesis consists of five chapters. The first chapter provides an introduction and ties the three research papers together under the main theme of the role of accounting information in understanding banks' behavior and the last chapter provides a brief conclusion. In the second chapter, I study the capital market consequences of unique and unexpected mandatory disclosures of banks' liquidity and the resulting changes in banks' behavior. I employ a hand-collected sample of the disclosures of banks' borrowing from the US Federal Reserve Discount Window (DW) during the financial crisis. I find that these disclosures contain positive incremental market information as they decrease banks' cost of capital. However, I also find evidence of endogenous costs associated with more disclosure. I document that banks respond to the DW disclosures by increasing their liquidity holdings and decreasing risky assets. In line with the theoretical predictions of Goldstein and Sapra (2013), this finding indicates that, following the DW disclosures, banks try to avoid accessing the DW facility, despite its cost of capital benefits. The third chapter studies whether universal banks exhibit more risky behavior and require additional governance mechanisms compared to pure-play commercial banks. Using a unique setting of the repeal of the Glass-Steagall Act of 1933, which removed barriers to universal banking in the United States, I examine whether commercial banks that become universal exhibit more risky behavior following the deregulation and change their corporate governance mechanisms. I find no observable difference in risk characteristics between universal and pure-play commercial banks. Furthermore, CEO pay-structure and compensation do not appear to be driven by the choice of the universal banking model. The fourth chapter examines the effect of compensation regulation on the banking sector. Using the UK as the setting, this chapter tests the changes in compensation practices in the UK after the passage of the Remuneration Code and examines the related changes in banks' behavior. We find that regulated firms exhibit less risk when they make changes to compensation contracts after the implementation of regulation. We also find lower turnover among the regulated firms after the introduction of the Remuneration Code, potentially due to decreased job opportunities in the financial services sector following the financial crisis. Although some of the above changes can be perceived as benefits of regulation, an event study we conduct on the day the European Union announced a bonus cap finds negative abnormal returns. This finding is suggestive of investors perceiving at least some costs from regulating executive compensation