Bank Stress Test Disclosures, Private Information Production, and Price Informativeness

Pursuant to the Dodd-Frank Act, from 2015-2017, banks holding assets between $10 - $50 billion were required to disclose a portion of their company-run stress test results. We find that these disclosures are associated with a 5.9% reduction in analyst following, driven by more experienced analysts. Analysts that continue to follow these banks issue forecasts that are less dispersed and contain less firm-specific information. Furthermore, post-disclosure, bank equity returns become more synchronous with the entire stock market, indicating that returns contain less firm-specific information. While disclosure of stress test results was intended to enhance market monitoring, our results do not support an increase in market monitoring. Instead, they are consistent with recent theory models suggesting that increased regulatory disclosures may have unintended consequences.