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

Jeremy Bertomeu*, Robert P. Magee

*Corresponding author for this work

Research output: Contribution to journalArticle

41 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)209-227
Number of pages19
JournalJournal of Accounting and Economics
Volume52
Issue number2-3
DOIs
StatePublished - Nov 1 2011

Keywords

  • Accounting standards
  • Business cycle
  • Credit crisis
  • Debt contracting
  • Lobbying
  • Political economy
  • Regulation

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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