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November 04, 2021 03:57 AM

Does Citizens’ Financial Literacy Relate to Bank Financial Reporting Transparency?

Posted by jjin

Since the 2007–2008 global financial crisis, governments, financial sector experts, and academics have emphasized the role of financial literacy in supporting inclusive and sustainable growth as well as the relationship between financial education and broader financial, economic, and social outcomes (OECD, 2018). Although financial literacy attracts global interest, not much empirical evidence exists to support its perceived role beyond the documented individual or household changes in financial behaviors, such as savings, equity investments, and borrowing.

Our research takes an initial step toward understanding the association between consumer behaviors and aggregate financial and economic outcomes. Banks are known to play a central role in economic and financial stability because they provide liquidity and capital for individuals and businesses. In this study, we examine the relationship between financial literacy and bank financial reporting transparency for a sample of banks from the U.S. Following prior literature, we employ discretionary loan loss provisions (DLLP) as our primary measure of bank reporting transparency. We argue that the financial literacy of their customers can influence bank managers’ behaviors with respect to both the mechanics of the loan loss provisioning and their opportunistic actions. Financially literate customers represent more stable sources of funding and have more predictable loan loss provisioning that contributes to more persistent earnings. Financial literacy could also enhance customers’ ability to indirectly follow and monitor bank performance and risk-taking. Therefore, bank managers will be less likely to engage in opportunistic earnings manipulation.

Following these arguments, we predict that citizens’ financial literacy is positively associated with bank financial reporting transparency. Consistent with our prediction, we find that the magnitude of bank DLLP is negatively related to state-level financial literacy. Moreover, the association between financial literacy and DLLP is higher for banks with more retail deposits and larger consumer loans, the two channels through which financial literacy could influence bank transparency.

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About jjin

McMaster University
Associate Professor

Justin Jin received his Ph.D. in Accounting from University of Toronto, a MBA degree in Accounting from University of Oklahoma and a Bachelor degree from Peking University. He is a Canadian Professional Accountant of Ontario, Chartered Accountant of...

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