The Impact of the Greek Sovereign Debt Crisis on European Banks' Disclosure and its Economic Consequences

Using a sample of European banks, this paper examines the link between disclosure and its economic consequences. We exploit an exogenous cost of capital shock created by the Greek sovereign debt crisis and analyze banks' disclosure responses to this shock. First, we find that European banks increase the length of their annual reports from 2009 to 2011, in particular, the risk reporting section. The increase in risk disclosure is mainly attributable to enhanced disclosure on credit risk, including information about any direct exposure to the European sovereign debt crisis. Our cross-sectional results show that the increase in length of either the annual report or the risk report is positively associated with the bank-specific cost of capital shock. Second, we find that the increase in risk disclosure mitigates the cost of capital shock, whereas the increase in the length of the annual report does not help reduce the cost of capital.