Competition and Opacity in the Financial System: An Equilibrium Analysis with Rollover Risk Gaoqing Zhang University of Minnesota
[email protected] Abstract This paper presents a theory on how competition among …nancial institutions (FIs) may make them more opaque. The theory endogenizes the public disclosure decisions of two FIs when both are exposed to rollover risk while simultaneously competing against each other in attracting investment from a common group of investors. The analysis identi…es a novel bene…t of competition in improving the coordination outcome for the FIs. This bene…t substitutes for and thus weakens the coordination role of public disclosure, inducing FIs to disclose less compared to a case in which the competitive interactions are absent. Keywords: coordination, interbank competition, disclosure policies, rollover risk, …nancial institutions, bank opacity, higher-order beliefs I thank Rick Antle, Mark Bagnoli, Anne Beyer, Andrew Bird, Carlos Corona, Alex Dontoh, Kai Du, Philip Dybvig, Pingyang Gao, Jonathan Glover, Frank Gigler, Steven Huddart, Xu Jiang, Chandra Kanodia, Jing Li, Pierre Liang, Xiaojing Meng, Stephen Morris, Lin Nan, Hong Qu, Stefan Reichelstein, Thomas Ruchti, Richard Sansing, Haresh Sapra, Jack Stecher, Philip Stocken, Shyam Sunder, Laura Veldkamp, Hao Xue and seminar participants at Carnegie Mellon University, Dartmouth College, New York University, Purdue University, Southwestern University of Finance and Economics (China), Stanford University, The Pennsylvania State University, University of Chicago, University of Minnesota and Yale University for helpful comments. All errors are mine own. Competition and Opacity in the Financial System: An Equilibrium Analysis with Rollover Risk Abstract This paper presents a theory on how competition among financial institutions (FIs) may make them more opaque.