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From low-quality reporting to financial crises: Politics of disclosure regulation along the economic cycle

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  • Bertomeu, Jeremy
  • Magee, Robert P.

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

Suggested Citation

  • Bertomeu, Jeremy & Magee, Robert P., 2011. "From low-quality reporting to financial crises: Politics of disclosure regulation along the economic cycle," Journal of Accounting and Economics, Elsevier, vol. 52(2), pages 209-227.
    • Handle: RePEc:eee:jaecon:v:52:y:2011:i:2:p:209-227
    DOI: 10.1016/j.jacceco.2011.08.005
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    More about this item

    Keywords

    Business cycle; Regulation; Political economy; Credit crisis; Debt contracting; Accounting standards; Lobbying;
    All these keywords.

    JEL classification:

    • D21 - Microeconomics - - Production and Organizations - - - Firm Behavior: Theory
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M48 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Government Policy and Regulation

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