Events

Professor Christopher Williams
Arthur Andersen Chaired Professor of Accounting
Stephen M. Ross School of Business
University of Michigan

We examine whether financial reporting incentives affect banks’ willingness to pay for deposit funding. Using novel hand-collected data on certificate-of-deposit auctions conducted by U.S. public entities from 2002 through 2020, we find that banks offer higher rates near fiscal year-end. This increase is stronger for banks that would likely report a small negative return on equity (ROE) absent an auction win and thus have stronger incentives to avoid reporting a loss. Using a stacked difference-in-differences design, we show that auction wins generate deposit inflows and are followed by increases in loan balances and related interest and fee income. Winning banks’ ROE improves in the auction year, but we find no significant improvement over the longer post-auction period. Expanded lending and higher loan income can help cover funding costs, while increased lending activity may also create an income–expense timing mismatch when qualifying fees are recognized in full before year-end but part of the associated deposit interest expense accrues afterward. Our findings identify window dressing as a previously unexplored determinant of higher rates on new deposits.