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Coordination and Conservatism
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DOI：10.1016/j.frl.2024.105035.png)
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Abstract
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This study investigates the role of accounting conservatism in bank depositors' coordination problem in Keynesian beauty contests. Even if the fundamental state of bank loans is sound, fear of premature withdrawals by other depositors may lead to a depositor's premature withdrawal, undermining the loan value. Higher precision of public disclosures is a double-edged sword: it exacerbates the coordination risk in bad times, even though it mitigates it in good times. We find that accounting conservatism is a useful built-in mechanism to tackle this tradeoff. Moreover, as the bank -run risk rises, more conservatism is desirable. Our study also generates regulatory implications for panic -based bank runs and empirical implications for cost of debt capital.
Keywords:
Coordination
Cost of debt capital
Accounting conservatism
Bank-run risk
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On the relation between conservatism in accounting standards and incentives for earnings management
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