The recent financial crisis had major economic, political and social impact across the world. Financial institutions are at the center of this storm, blamed for igniting the crisis and drastically suffering its effects in the form of bad financial performance and damaged public reputation. The effects of the crisis are a worldwide phenomenon, but they were particularly pronounced in Portugal, where the banking sector was severely affected. It is important for policy-makers, investors, lenders and society to understand the changes that crises cause in the financial sector and the mechanisms used to recover. This project aims to shed light on these issues. In particular we study the effects of the 2008 crisis on information disclosed by the banks as information is essential for the well-functioning of capital markets and economic development. 

Two issues make the study of financial institutions unique: the complexity of the business and specific regulations. In addition, there is a growing trend of information disclosed, due to an increase in regulation and public scrutiny. What information was disclosed, before and after the crisis? How do investors and other agents perceive that information? How does it affect capital markets? And banks reputation? Understanding these issues is essential to economic agents and policy-makers in order to make strategic choices that lead to the path of economic development. 

Disclosed information, i.e. the amount and quality of information disclosed (Diamond and Verrecchia, 1991), can be quantitative and financially-oriented or qualitative and oriented to non-financial stakeholders. This project analyzes the economic effects of banks’ disclosure of financial information and information related to corporate social responsibility (CSR) activities in a long time-series (2005 to 2015) that covers the crisis period and the period of changes in the banking regulation (i.e. European Capital Requirement Directive (CRD), 2014).

We start by developing a unique Disclosure Score tailored for financial institutions, which separates mandatory and voluntary disclosures. Differently from prior literature our risk disclosure index encompasses all types of risk identified in the CRD: credit, market, operational, interest rate and equity risk. We next study the association of the index with variables that reflect not only country level aspects (as culture) but also aspects of interest to capital markets such as information asymmetry, returns, and risk measures. This will expand previous findings mostly focused on only one type of risk and on a period before regulatory changes. 

Our second study focuses on own credit risk (OCR) disclosures. The informativeness of OCR changes has been one of the most controversial issues faced by International standard setters in their fair value project. As a consequence, the US Securities Exchange Commission recommended a re-examination of the accounting treatment of financial liabilities, in particular the extent to which the incorporation of OCR in the measurement of liabilities provides decision-useful information to investors. Evidence on this area is still small, likely due to the fact that data on OCR disclosures is unavailable in databases, thus it has to be hand-collected. The lack of literature and the importance of the topic for capital markets provide an interesting motivation to study the capital market effects of OCR disclosures in the banking industry.

The fourth task studies disclosures related to corporate social responsibility (CSR), as it is important to ascertain whether and how disclosure of CSR creates value for financial institutions. The creation of value along with economic growth and job creation are ones of the main concerns of today’s economies. We start by analyzing the quantity and quality of CSR disclosures of the financial institutions and their clients. This aims at capturing one aspect of social responsibility that is unique to financial institutions: whether they take into consideration the level of social responsibility of the firms they make loans to and the economic consequences of such consideration.

The final task studies whether and how banks rebuild their damaged reputation through disclosure of CSR.. The recent financial crisis has caused considerable damage in banks’ relationships and public image. Hence these institutors are in great need to repair their reputation if they want to rebuild their relationships with clients, employees and investors. Communicating in a positive and trustworthily way is a central issue in rebuilding trust for banks. In our final task, we assess whether financial institutions increase CSR disclosures and increase the positive tone of their communications as a means to improve public image (as defended by signaling theory), and to create a positive impression that compensates for the deterioration of financial performance during the crisis period.

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