ACCOUNTING


Te Spillover Effect of Liquidity Transparency on Liquidity


YAO LU ASSISTANT PROFESSOR


Samuel Curtis Johnson Graduate School of Management


Cornell SC Johnson College of Business Cornell University


Author • Yao Lu


Holdings Journal of Accounting Research, 63, 4, February 2025 LINK TO PAPER


Assistant Professor, Samuel Curtis Johnson Graduate School of Management, Cornell SC Johnson College of Business, Cornell University


Summary Liquidity holdings among banks are central to the stability of the financial sys-


tem, as seen through the 2008 financial crisis, the crash of bank stocks during the COVID-19 pandemic, and the 2023 regional bank crisis. Tis paper reveals how a new economic force, the spillover effect of mandated liquidity disclo- sure, can shape a bank’s liquidity holdings, showing that transparency of peer banks’ liquidity can drive liquidity decisions and affect liquidity regulations. Te author empirically examines how regulatory requirements on individual banks’ liquidity transparency affect the liquidity of peer banks.


Using bank business interactions to measure the treatment intensity of the disclosure, the author finds that nondisclosing banks cut their liquidity signifi- cantly more in response to the disclosure. In addition, the disclosure rule was followed by lower overall liquidity and a build-up of systemic risk, indicating an economically considerable disclosure spillover effect in the aggregate. In particular, liquidity information, especially that of large banks, can reveal the risk of liquidity shocks in the banking system, which can in turn affect banks’ demand for liquid assets.


CONTENTS TO MAIN


| RESEARCH WITH IMPACT: CORNELL SC JOHNSON COLLEGE OF BUSINESS • 2025 EDITION


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