Fool the Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia

23 Pages Posted: 4 Aug 2008

See all articles by Kerstin Bernoth

Kerstin Bernoth

German Institute for Economic Research (DIW Berlin)

Guntram B. Wolff

Deutsche Bundesbank; University of Bonn - Center for European Integration Studies (ZEI)

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Abstract

We investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. We find that two different measures of creative accounting indeed both increase the spread. The increase of the risk premium is stronger, if financial markets are unsure about the true extent of creative accounting. Moreover, fiscal transparency reduces risk premia. Instrumental variable regressions confirm these results by addressing potential reverse causality problems and measurement bias.

Suggested Citation

Bernoth, Kerstin and Wolff, Guntram B., Fool the Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia. Scottish Journal of Political Economy, Vol. 55, No. 4, pp. 465-487, September 2008, Available at SSRN: https://ssrn.com/abstract=1184116 or http://dx.doi.org/10.1111/j.1467-9485.2008.00462.x

Kerstin Bernoth (Contact Author)

German Institute for Economic Research (DIW Berlin) ( email )

Mohrenstraße 58
Berlin, 10117
Germany

Guntram B. Wolff

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

University of Bonn - Center for European Integration Studies (ZEI) ( email )

Regina-Pacis-Weg 3
Postfach 2220
D-53012 Bonn
Germany

HOME PAGE: http://www.uni-bonn.de/~guntram

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