Mandatory Disclosure, Voluntary Disclosure, and Stock Market Liquidity: Evidence from the EU Bank Stress Tests

We use the EU stress tests and the Eurozone sovereign debt crisis to study the consequences of supervisory disclosure of banks' sovereign risk exposures. We test the idea that a mandatory one-time disclosure induces an increase in voluntary disclosures about sovereign risk in the following periods and, through the shift in the voluntary disclosure equilibrium, increases the liquidity of banks' shares. First, we find that the timing and content of different mandatory disclosure events helps explain the levels of stress-test banks' voluntary disclosures about sovereign risk. Second, although the bid-ask spreads of stress test participants generally increased after the mandatory stress test in 2011, our results suggest that the decrease in market liquidity is entirely attributable to those stress-test participants that did not commit to voluntarily maintaining the disclosures of sovereign risk exposure.