Mandatory disclosures: rationale, evolution and impact — An examination of the banking sector

This thesis explores mandatory disclosures provided by firms to markets, regulatory authorities and other bodies that have been increasing exponentially over the years with the corresponding increase in costs of such disclosures. Existing literature on mandatory disclosures fail to put information at the heart of the explanation, nor does it conform with the stylised view of a Principal-Agent relationship between the regulator and the firm. As a first step the thesis using a Principal-Agent framework develops an alternative explanation for the existence of mandatory disclosures that provides an information cost based economic rationale for their existence and is consistent with wider literature on regulations. As the next step the thesis explores disclosure regulation, in the context of banking, over time and the extent to which such regulations are aligned with the rationale for mandatory disclosures provided by the aforementioned explanation. The analysis of regulatory pronouncements suggests that such pronouncements are aligned with the criterion outlined in the aforementioned explanation thereby providing credence to the same. Finally, the thesis using event study methodology and a portfolio of systematically important banks empirically evaluates the impact of mandatory disclosures, more specifically Pillar 3 risk disclosures, on the behaviour (or actions) of external suppliers of capital, more specifically bond market investors - a key set of stakeholders who are expected to benefit most from such disclosures and who are expected to impose market discipline on firms, where necessary. The results suggest that for the sample of systematically important banks considered, Pillar 3 disclosures do not have an impact on bond investors, investors most expected to benefit from such disclosures and also critically who are expected to impose market discipline on banks. The empirical analysis also draws on and improves upon the state of the art in bond market event study analysis.