Window Dressing of Financial Leverage

We investigate bank holding companies’ window dressing of quarter-end financial leverage through short-term borrowings, and the stock market reaction around the public release of information that can be used to infer such window dressing. We find evidence of downward window dressing of repo and federal funds liabilities that appear material for a large fraction of the sample, particularly among the largest banks. Firms with greater financial leverage have more repo and federal funds liabilities in the makeup of their total liabilities and are more likely to engage in downward window dressing in these accounts. Finally, the stock market reacts negatively to information indicating greater downward window dressing in these accounts. The potential implications of our findings go beyond bank holding companies and the financial industry, and bear relevance to recent SEC deliberations regarding short-term borrowing disclosure regulations.