Financial Accounting in the Banking Industry: A Review of the Empirical Literature

121 Pages Posted: 30 Oct 2013

See all articles by Anne Beatty

Anne Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems

Scott Liao

University of Toronto - Rotman School of Management

Date Written: October 23, 2013

Abstract

We survey research on financial accounting in the banking industry. After providing a brief background of the micro-economic theories of the economic role of banks, why bank capital is regulated, and how the accounting regime affects banks’ economic decisions, we review three streams of empirical research. Specifically we focus on research examining the relation between bank financial reporting and the valuation and risk assessments of outside equity and debt, the relation between bank financial reporting discretion, regulatory capital and earnings management, and banks’ economic decisions under differing accounting regimes. We provide our views about what we have learned from this research and about what else we would like to know. We also provide some empirical analyses of the various models that have been used to estimate discretion in the loan loss provision. We further discuss the inherent challenges associated with predicting how bank behavior will respond under alternative accounting and regulatory capital regimes.

Keywords: financial accounting; bank regulatory capital; information asymmetry

JEL Classification: E5, M4

Suggested Citation

Beatty, Anne L. and Liao, Wei-Yi (Scott), Financial Accounting in the Banking Industry: A Review of the Empirical Literature (October 23, 2013). Rotman School of Management Working Paper No. 2346752. Available at SSRN: https://ssrn.com/abstract=2346752 or http://dx.doi.org/10.2139/ssrn.2346752

Anne L. Beatty

Ohio State University (OSU) - Department of Accounting & Management Information Systems ( email )

2100 Neil Avenue
Columbus, OH 43210
United States

Wei-Yi (Scott) Liao (Contact Author)

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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