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Review of Accounting Studies

Erschienen in:

17.04.2018

The market reaction to bank regulatory reports

verfasst von: Brad A. Badertscher, Jeffrey J. Burks, Peter D. Easton

Erschienen in: Review of Accounting Studies | Ausgabe 2/2018

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Abstract

We investigate the role of bank regulatory reports in the information environments of banks. Our findings are as follows. (1) Call Reports but not FR Y-9Cs elicit economically significant stock price and volume reactions when they are publicly released, despite the fact that Call Reports usually follow earnings announcements. (2) Some of the reaction is traceable to a schedule dealing with mortgage lending and servicing. (3) The release of the Call Reports is tightly clustered around the 30th day after quarter-end. (4) After bank regulators undertook a “modernization project” to speed the processing and public dissemination of regulatory reports, the banking industry routinely experiences abnormal stock price volatility and trading volume on the 30th day of the quarter. (5) The market reaction increased after media coverage of this study. Our findings are of interest to regulators who require and monitor the reports, banks that prepare the reports, investors who may use the reports, and academics who can base research designs on the timing patterns we uncover.

Vorheriger Artikel Shifting corporate culture: executive stock ownership plan adoptions and incentives to meet or just beat analysts’ expectations

Nächster Artikel Financial reporting fraud and other forms of misconduct: a multidisciplinary review of the literature

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The recognition and measurement practices followed in creating the regulatory reports conform to U.S. generally accepted accounting principles (GAAP), although the reports provide information that goes beyond what is required by U.S. GAAP. Because Call Reports are bank-level reports, each bank (along with its consolidated subsidiaries) is considered an accounting entity (FDIC 2012, 11).

Gathering these dates in real time by downloading the bank files each day from SNL Financial was necessary because SNL Financial overwrites its record of the original filing when there is an amendment.

For ease of exposition, we refer to “day 30” as the 30th calendar day following quarter-end or as the next business day, if the 30th calendar day falls on a weekend or holiday.

Regulation FD requires advanced notice of earnings conference calls (SEC 2000). Although no advanced notice of earnings press releases is technically required, in practice the vast majority of public companies issue prior notices of earnings press releases because conference calls are typically conducted in conjunction with the press release. Even before Regulation FD, it was common practice for firms to give prior notice of earnings releases.

Some studies of the EDGAR period find a statistically significant market reaction on 10-K/10-Q filing dates (Asthana and Balsam 2002; Griffin 2003; You and Zhang 2009) but do not control for concurrent earnings news.

The official form name of the Call Report is “FFIEC 031” for banks with domestic and foreign offices and “FFIEC 041” for banks with domestic offices only. Bank holding companies with total consolidated assets of less than $500 million generally are not required to file Y-9Cs.

The Call Report fields are RSSD8798 and RSSD8799.The Y-9C fields are BHCKF841 and BHCKF842.

SNL Financial (now S&P Global) also collects, standardizes, and disseminates all relevant corporate, financial, market and M&A data for the banking, financial services, insurance, real estate, energy, and metals and mining industries.

Any report released on a U.S. holiday or a weekend is adjusted to the next trading day. In addition, during the sample period the U.S stock market was closed due to Hurricane Sandy on Oct. 29 and 30, 2012, and therefore we assign Oct. 31 as the regulatory filing date.

An alternative approach would be to base the denominator on days nearer to the event, and to use days both before and after the event. However, a difficulty with this approach is that the days near a given report’s release often contain other report releases, and market activity may be high for several days around these other report releases, complicating efforts to purge nonnormal days from the control window.

We do not market adjust bank i’s share turnover because the share turnover of our sample banks tends to exhibit a weak relation with market-level share turnover. In untabulated analysis, we estimate bank-quarter regressions of two-day bank-level share turnover on two-day market-level share turnover over the last month of the quarter (i.e., over the control period used in the VOL denominator). We find no statistically positive relation for 52% of bank-quarters. This absence of a statistically positive relation is particularly common among banks whose Call Reports are released before earnings announcements; we find no statistically positive relation for 69% of these bank-quarters, with 35% having a negative estimated relation. In robustness tests, we market-adjust VOL as in Garfinkel and Sokobin (2006) and find statistically higher volume around Call Reports releases that follow earnings announcements. Volume is not statistically higher for Call Reports that precede earnings announcements, perhaps because the market adjustment creates noise for these banks in particular.

In our sample period, the 30th calendar day always falls on a trading day.

Figure 1 may not be used as an indication of the degree of clustering of Y-9C reports because fourth-quarter Y-9Cs have a different due-date than interim quarter Y-9Cs; we address this issue next.

Despite the spike in market activity, in untabulated analysis, we find almost no media coverage of Call Report releases. In the five days (−2, +2) surrounding day 30 from 2005 to July 2017, we find that an average of 0.2 articles per day mention “Call Report” on the Dow Jones Newswire. We also find no increase in analyst forecast revisions around peak release times of Call Reports or Y-9Cs.

Because we tailor the day numbering scheme to the Call Report due date, the figures slightly understate the degree of Y-9C clustering. This occurs because the number of trading days between day 0 and the due date of the Y-9C varies across quarters. For example, in one quarter the Y-9C due date might fall on day +7, but in another quarter, it might fall on day +8.

Banks that exceed the $2 million threshold for schedule RC-D can opt out if they have no foreign offices and less than $100 million in total assets (FDIC 2013b, 1). Banks with less than $1 billion in total assets must complete schedule RC-P if they exceed $10 million in certain mortgage origination, purchase, or sale activities (FDIC 2013c, 1).

In untabulated analysis, we find that several other measures of report detail and bank complexity are highly correlated with bank size, causing regression (5) to exhibit significant multicollinearity after including interactions that control for bank size. These measures include the number of nonzero cells in key schedules, the aggregated absolute quarterly change in the cell values of key schedules (scaled by assets), a word count of the earnings release, an indicator variable capturing derivatives usage, and an indicator variable capturing multibank BHCs.

These amendments are mutually exclusive of the accounting errors corrected using cumulative effect adjustments on line 2 of Call Report schedule RI-A – Changes in Bank Equity Capital. If a bank corrects an error by amending a past report, this line on schedule RI-A would be left blank. Conversations with bank regulators indicate that more significant errors should be corrected via amendment, while less significant errors can be corrected by making a cumulative effect adjustment on schedule RI-A.

Untabulated analysis shows that 93% of Y-9Cs are amended over the remainder of the quarter that we track. Only 1.5 (3.9) percent of the amendments affect the total assets balance (Tier 1 capital ratio). Similar to Call Report amendments, Y-9C amendments are most likely to occur within the two weeks after filing.

To ensure that t-statistics for the difference in mean and median tests are well specified in light of the large overall sample size, we simulate a distribution of t-statistics by repeating the following randomization procedure 10,000 times. We randomly assign 2061 of the 159,002 total sample observations to a pseudo-CALL group (because there are 2061 observations in the actual CALL group) and the rest to a pseudo-non-event group. Then we compute t-statistics for the difference in mean and median RET across both groups. The resulting empirical distributions of t-statistics closely conform to the theoretical t-distribution. The empirical distribution of t-statistics for the difference-in-means (Wilcoxon) test has a 90th, 95th, and 99th percentile of 1.27, 1.65, and 2.32 (1.24, 1.62, and 2.26). The corresponding percentiles for the theoretical distribution of t-statistics are 1.28, 1.65, and 2.33. The slightly lower percentile values found in the empirical distributions indicates that in our sample it is slightly more difficult to reject the null hypothesis at the given confidence level using parametric tests.

This analysis omits many EA2 and CALL1 events, which explains why CALL1 events represent only 9% of total CALL events in this sample in contrast to the 19% previously reported for the full sample. We omit CALL1, CALL2, EA1, and EA2 events from this and subsequent analyses if they are not the first two events in the sequence of the four events for the bank in a given quarter. In other words, the events are omitted if a 10-K/Q or Y-9C is among the first two events. We do not impose this limitation on CALL and EA events, which explains why the number of CALL events exceeds the number of CALL1 plus CALL2 events, and the number of EA events exceeds the number of EA1 plus EA2 events. Additionally, the counts of EA1 and CALL2 events differ due to five bank-quarters in which the 10-K/Q was released on the Call Report day or day after, causing five CALL2 events to be omitted from the sample.

65% = 0.7654 estimated EA coefficient / 1.1689 non-event day mean from the intercept.

The estimate of the coefficient on CALL remains of similar magnitude and significance when excluding Call Reports filed within days (−1, +3), relative to the earnings announcement (as opposed to controlling for those days using EA_EXPANDED).

Inferences are robust to two controls for potential concurrent events. First, we find that including an indicator variable equal to 1 on the 30th day of all months has little effect on the coefficient magnitude or significance of CALL. Second, we control for two specific concurrent events, Federal Open Market Committee (FOMC) statements and “advance” estimates of gross domestic product growth, which are sometimes released on or near the 30th day of the quarter. During the sample period, six of the 18 FOMC statements and four of the nine GDP announcements were released on or within a day of day 30. We re-estimate equation (3) after including two indicator variables that equal 1 on the days of FOMC statements and GDP announcements. We find that including the indicators has little effect on the magnitude or significance of the estimate of the coefficient on CALL.

Earnings surprise is measured as the difference between current and four-quarters-ago Call Report earnings scaled by price.

We obtained the database of BHCs from the Federal Reserve Bank of New York (http://www.newyorkfed.org/research/banking_research/datasets.html). The dataset yields 769 BHCs with stock returns available on CRSP sometime between Jan. 1, 2000, and Dec. 31, 2013.

The study was covered by Bloomberg (Hamilton and Katz 2015), The Wall Street Journal Moneybeat blog (Tracy 2015), and other regional and Canadian publications. SNL Financial and Barclays Equity Research also featured the study to subscribers.

American Bankers Association (ABA), The Clearinghouse Association L.L.C, and Financial Services Roundtable. (2011). Letter to Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of Thrift Supervision (September 26). https://www.federalreserve.gov/SECRS/2011/November/20111122/ICP-201111/ICP-201111_092611_87689_323750831883_1.pdf. Accessed 12 March 2018.

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Federal Deposit Insurance Corporation (FDIC). (2012). Call Report instruction book update. https://www.fdic.gov/regulations/resources/call/crinst/2012-03/312Inserts_033112.pdf. Accessed 12 March 2018.

Federal Deposit Insurance Corporation (FDIC). (2013a). Call Report instruction book update. https://www.fdic.gov/regulations/resources/call/crinst/2013-06/613Inserts_063013.pdf. Accessed 12 March 2018.

Federal Deposit Insurance Corporation (FDIC). (2013b). Schedule RC-D – trading assets and liabilities. https://www.fdic.gov/regulations/resources/call/crinst/2013-03/313rc-d_033113.pdf. Accessed 12 March 2018.

Federal Deposit Insurance Corporation (FDIC). (2013c). Schedule RC-P – 1-4 family residential mortgage banking activities. https://www.fdic.gov/regulations/resources/call/crinst/2013-09/913rc-p_093013.pdf. Accessed 12 March 2018.

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Titel: The market reaction to bank regulatory reports
verfasst von: Brad A. Badertscher
Jeffrey J. Burks
Peter D. Easton
Publikationsdatum: 17.04.2018
Verlag: Springer US
Erschienen in: Review of Accounting Studies / Ausgabe 2/2018
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI: https://doi.org/10.1007/s11142-018-9440-8

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