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From Low-Quality Reporting to Financial Crises: Politics of Disclosure Regulation Along the Economic Cycle

Jeremy Bertomeu

CUNY Baruch College

Robert P. Magee

Northwestern University

April 27, 2011

Journal of Accounting & Economics (JAE), Forthcoming

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 discuss implications for procyclicality, event studies, bank lobbying, mark-to-market and cost of capital.

Number of Pages in PDF File: 41

Keywords: Business Cycle, Regulation, Positive Economics, Political, Financial Crisis, Credit Market, Accounting Standards, Lobbying

JEL Classification: D2, D7, D8, D9, E3, E6, G2, G3, H1, K2, M1, M4

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Date posted: September 19, 2010 ; Last revised: August 26, 2011

Suggested Citation

Bertomeu, Jeremy and Magee, Robert P., From Low-Quality Reporting to Financial Crises: Politics of Disclosure Regulation Along the Economic Cycle (April 27, 2011). Journal of Accounting & Economics (JAE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1678270

Contact Information

Jeremy Bertomeu (Contact Author)
CUNY Baruch College ( email )
17 Lexington Avenue
New York, NY 10021
United States
Robert P. Magee
Northwestern University ( email )
2001 Sheridan Road
Evanston, IL 60208
United States
847-491-2676 (Phone)
847-467-1202 (Fax)
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