Do Strict Regulators Increase the Transparency of Banks?

Posted: 3 Jul 2019

See all articles by Anna M. Costello

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: June 1, 2019

Abstract

We investigate the role that regulatory strictness plays on the enforcement of financial reporting transparency in the U.S. banking industry. Using a novel measure of regulatory strictness in the enforcement of capital adequacy, we show that strict regulators are more likely to enforce restatements of banks' 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 study indicate that regulatory oversight plays an important role in enforcing financial reporting transparency, particularly in periods leading up to economic crises. We interpret this evidence as inconsistent with the idea that strict bank regulators put significant weight on concerns about the potential destabilizing effects of accounting transparency.

Keywords: banking; accounting transparency; regulation; regulatory enforcement; accounting restatements

JEL Classification: E58; G21; M40; M41

Suggested Citation

Costello, Anna M. and Granja, Joao and Weber, Joseph Peter, Do Strict Regulators Increase the Transparency of Banks? (June 1, 2019). Journal of Accounting Research, Vol. 57, No. 3, 2019. Available at SSRN: https://ssrn.com/abstract=3413759

Anna M. 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 Peter 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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