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Do Strict Regulators Increase the Transparency of the Banking System?

54 Pages Posted: 21 Jun 2015 Last revised: 26 May 2016

Anna M. Costello

University of Michigan, Stephen M. Ross School of Business

Joao Granja

University of Chicago - Booth School of Business

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: May 24, 2016

Abstract

We investigate the role of regulatory incentives on the enforcement of financial reporting transparency in the U.S. banking industry. The previous literature suggests that banking regulators use discretion to facilitate regulatory forbearance. Yet, is not clear whether these actions result from lax oversight or whether they are necessary to prevent further financial instability. Using a novel measure of the quality of regulatory enforcement, we show that strict regulators are more likely to enforce income-reducing reporting choices by forcing banks to restate their overly aggressive call reports. Further, we find that the effect of regulatory strictness on accounting enforcement is strongest in periods leading up to economic downturns and for banks with riskier asset portfolios. Overall, the results from our analyses are consistent with the notion that regulatory incentives play an important role in enforcing financial reporting transparency, particularly in periods leading up to economic crises.

Keywords: Banking, Accounting Transparency, Regulatory Forbearance

JEL Classification: G01, G21, G28, M41

Suggested Citation

Costello, Anna M. and Granja, Joao and Weber, Joseph, Do Strict Regulators Increase the Transparency of the Banking System? (May 24, 2016). Available at SSRN: https://ssrn.com/abstract=2620853 or http://dx.doi.org/10.2139/ssrn.2620853

Anna Costello

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States

Joao Granja (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Room 326
Chicago, IL 60637
United States

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

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