From low-quality reporting to financial crises: Politics of disclosure regulation along the economic cycle

From low-quality reporting to financial crises: Politics of disclosure regulation along the... This paper examines how financial reporting regulations affect, and respond to, macroeconomic cycles by exploring a positive framework in which regulators subject to political pressures respond to cyclical demands by borrowers and lenders. We establish that, as economic conditions initially decline, political power shifts toward interest groups favoring less financial transparency. What follows is a counter-cyclical increase in economic activity, as more non-reporting loans are financed, possibly coincidental with more aggregate uncertainty. During a recession, reporting quality is increased, potentially causing a crisis-like adjustment of economic activity to the cycle. We also discuss implications for event studies, bank lobbying, mark-to-market and cost of capital. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting and Economics Elsevier

From low-quality reporting to financial crises: Politics of disclosure regulation along the economic cycle

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Publisher
Elsevier
Copyright
Copyright © 2011 Elsevier B.V.
ISSN
0165-4101
DOI
10.1016/j.jacceco.2011.08.005
Publisher site
See Article on Publisher Site

Abstract

This paper examines how financial reporting regulations affect, and respond to, macroeconomic cycles by exploring a positive framework in which regulators subject to political pressures respond to cyclical demands by borrowers and lenders. We establish that, as economic conditions initially decline, political power shifts toward interest groups favoring less financial transparency. What follows is a counter-cyclical increase in economic activity, as more non-reporting loans are financed, possibly coincidental with more aggregate uncertainty. During a recession, reporting quality is increased, potentially causing a crisis-like adjustment of economic activity to the cycle. We also discuss implications for event studies, bank lobbying, mark-to-market and cost of capital.

Journal

Journal of Accounting and EconomicsElsevier

Published: Nov 1, 2011

References

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