Ethical bank disclosures and liquidity creation

Abstract

Ethics in finance and in banks have attracted increasing attention after the global financial crisis of 2007–2009. Although engagement in more ethical activities for banks has been a legitimate social expectation, the impact of it on the financial performance appears to be unclear. We examine whether ethics-related disclosures can help banks create more liquidity by conducting textual analysis of hand-collected bank annual reports and unearth interesting findings. First, we find that the probability of including a code of ethics in the annual report increases with bank risk (i.e. loan loss reserves and risk-weighted assets). Second, our results indicate that liquidity creation is positively associated with the relative frequency of ethics-related terms in the annual reports of banks that publish a code of ethics. Our findings suggest that ethical bank disclosures can mitigate risk concerns and attract more business that allows banks to create more liquidity.