Information asymmetry around operational risk announcements

Ahmed Barakat, Anna Chernobay, Mark Wahrenburg

Research output: Contribution to journalArticle

8 Citations (Scopus)

Abstract

Operational risk incidences are likely to increase the degree of information asymmetry between firms and investors. We analyze operational risk disclosures by US financial firms during 1995-2009 and their impact on different measures of information asymmetry in the firms' equity markets. Effective spreads and the price impact of trades are shown to increase around the first announcements of such events and to revert after the announcement of their settlement. This is especially pronounced for internal fraud and business practices related events. Market makers respond to higher information risk around the first press cutting date by increasing the quoted depth to accommodate an increase in trading volumes. The degree of information asymmetry around operational risk events may be influenced by the bank's risk management function and the bank's governance structure. We indeed find that information asymmetry increases more strongly after events' first announcements when firms have weaker governance structures-lower board independence ratios, lower equity incentives of executive directors, and lower levels of institutional ownership. In contrast, the firms' risk management function has little to no impact on information asymmetry. We interpret this as evidence that the risk management function is primarily driven by regulatory compliance needs. The results of this study contribute to our understanding of information asymmetry around operational risk announcements. They help to shed light on the role that regulation and corporate governance can play in order to establish effective disclosure practices and to promote a liquid and transparent securities market.

Original languageEnglish (US)
Pages (from-to)152-179
Number of pages28
JournalJournal of Banking and Finance
Volume48
DOIs
StatePublished - 2014

Fingerprint

Announcement
Asymmetry of information
Operational risk
Information asymmetry
Risk management
Governance structure
Institutional ownership
Equity markets
Risk disclosure
Market makers
Business practices
Board independence
Trading volume
Effective spread
Equity incentives
Fraud
Disclosure
Firm risk
Information risk
Regulatory compliance

Keywords

  • Bid-ask spread
  • Corporate governance
  • D82
  • Enterprise risk management
  • G14
  • G30
  • Information asymmetry
  • Market liquidity
  • Operational risk

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Information asymmetry around operational risk announcements. / Barakat, Ahmed; Chernobay, Anna; Wahrenburg, Mark.

In: Journal of Banking and Finance, Vol. 48, 2014, p. 152-179.

Research output: Contribution to journalArticle

Barakat, Ahmed ; Chernobay, Anna ; Wahrenburg, Mark. / Information asymmetry around operational risk announcements. In: Journal of Banking and Finance. 2014 ; Vol. 48. pp. 152-179.
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