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Accounting restatements reduce the amount of liquidity that banks create – but why?

Banks play an important role in increasing liquidity, or the ease with which individuals and firms can buy and sell assets, in the broader economy. When banks revise past accounting statements by issuing restatements, how does this impact banks’ liquidity creation?

Wei Wang finds banks that issue accounting restatements create 2.8% less liquidity than similar banks that do not issue accounting restatements. However, this is not due to information asymmetryan effect where accounting errors dissuade investors from making deposits—as most scholars would predict. Instead, bank regulators impose supervisory actions that reduce liquidity creation when financial misconduct is revealed through restatements. 

The findings demonstrate how accounting impacts banks’ core function to facilitate lending between investors and borrowers.