Date : January 23rd, Thursday 17:15-18:45
Speaker: Ms Yoshie Saito Lord (Brooklyn College, The City University of New York)
Title: Do Bank Managers Signal Through the Cash Flow Statement?
(Abstract)
Contrary to prevalent arguments that banks’ cash flows statements are not useful, our results suggest that Japanese bank manages use cash flow statements to send signals about bank risk to convey vital inforamtion to regulatory authorities. Traditionally, Japanese policy makers frequently intervened in bank operations. However, such interventions are often costly for bank managers. Declining operating cash flows indicate a potential shortage of liquid assets, which increases the bank risk. We propose that bank mangers shift cash flows from investing activities to operating activities when prior operating cash flow decreases to send signals to regulators about their risk exposures. Our results are consistent with this signaling story. We also show that the information in cash flow statements contributes significantly to market-based bank risk beyond other commonly used fundamental risk metrics. Firm-specific market risk is significantly associated with items in operating cash flows, and this association varies between financial crisis and non-crisis periods. We also show that items that are often used for classification shifting in the cash flows statements are useful to assess bank risk because managers have incentives to move items from operation activities to investing activities and vice versa to implicitly communicate with regulators.
