Do bank examinations influence a stock's price?
Not surprisingly in an era of deregulation, a study by an economist at the Federal Reserve Bank of Boston finds that they do.
Banks tend to make more information available to the public when they are being examined by regulators or just after such examinations, John S. Jordan, an economist, said in the Boston Fed's New England Economic Review.
As a result, he says, bank examinations affect a bank's stock, even though the examination reports are not made public.
Financial statements generally look very different if they are released when an exam is going on, he said and the bank exam can be an important tool to help investors better understand banking companies.
Mr. Jordan drew his conclusions after studying stock prices and financial statements that were issued during the New England banking crisis.
Some analysts and investors agree with Mr. Jordan's conclusions. "If the examiners find something, then certainly you're going to reflect that information in your next financial statement," said Benjamin C. Bishop, the president of Allen Ewing & Co., a money manager in Jacksonville, Fla. "There's no question the bank will take appropriate action," he said, and this could move the stock price.
"If there is an incremental change that a bank exam picks up, you're likely to find out about it in the bank's next financial statement," said Adam Klauber, an analyst with Cochran, Caronia Securities & Co. in Chicago.
"It's the nature of the information," said James L. Bellessa, principal with D.A. Davidson & Co., a money manager in Great Falls, Mont.
"If the examiner said simply that you have to put a new lock on your door, that is not going to find its way to shareholders," Mr. Bellessa said. "If your procedures aren't adequate, I could see that getting to the public and having an influence on the stock price."
But not everyone agrees.
"I've not had many cases like that," said David West, an analyst with the money manager Davenport & Co. in Richmond, Va.
"Certainly if a bank got a negative report it would have to ask itself if it needs to be disseminated," Mr. West said. "If they did act, I could see how it would get to investors and move the stock."
Edward Najarian, a banking analyst with First Union Capital Markets in Richmond, Va., said any impact would depend on what the information was. "If an examiner found something material, the bank would have to make a decision," he said. "I don't know what the discretionary leeway is in making such a report."
"One of the things that we as analysts have to take as fact is that audited financial statements are right," Mr. Najarian said. "You assume that everyone is playing by the rules."
Andrew B. Collins, a banking analyst at ING Barings, Furman Selz & Co., said that "as a former bank examiner, I have firsthand experience" with a bank failing to report a significant problem.
"There was an incident in 1992 when I was examining a bank in Connecticut and it didn't report what we found. But it didn't get them anywhere," Mr. Collins said. "They ended up having to re-file their statement."