Investment Opportunity Sets, Accounting-Based Regulatory Contracts, and Accounting Discretion
24 Pages Posted: 19 Jun 2000
Date Written: May 5, 2000
This paper examines the relationship between accounting discretion and investment opportunity sets (IOSs) of regulated banks in the presence of accounting-based regulatory contracts. Specifically, the proposition that accounting discretion allows a bank to avoid constraints on its IOS resulting from risk-based regulatory capital requirements is examined. The conditions under which accounting discretion can influence a bank's IOS are explored and results suggest that, in general, accounting discretion has no effect on a bank's IOS, or on compliance with regulatory capital requirements, independent of its effect on dividends or other financing transactions.
JEL Classification: G21, G28, M41, M43
Suggested Citation: Suggested Citation