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

41 Pages Posted: 19 Sep 2010 Last revised: 26 Aug 2011

Jeremy Bertomeu

City University of New York (CUNY) - Stan Ross Department of Accountancy

Robert P. Magee

Northwestern University

Date Written: April 27, 2011

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

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

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: https://ssrn.com/abstract=1678270

Jeremy Bertomeu (Contact Author)

City University of New York (CUNY) - Stan Ross Department of Accountancy ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
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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