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The impact of accounting laws and standards on bank risks: Evidence from transition countries

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  • Fang, Yiwei
  • Fornaro, James
  • Li, Lingxiang
  • Zhu, Yun

Abstract

It is well documented that institutional development has greatly enhanced bank stability by reducing risk-taking. We examine the causal effect of accounting system development on bank risk-taking based on difference-in-difference (DID) models in the context of institutional reforms. By creating two distinct measures of the accounting system: the distance to the International Financial Reporting Standards (IFRS Index) and the domestic accounting law enactment (Accounting Law Index), we show that the accounting system has a significant impact on bank risk-taking in the Central and Eastern European (CEE) countries. Specifically, compliance with the IFRS induces large drop in bank risk, while increased domestic accounting laws lead to greater risk-taking. We also show that European Union membership reinforces the effect of the IFRS Index on bank risk-taking for those transition countries.

Suggested Citation

  • Fang, Yiwei & Fornaro, James & Li, Lingxiang & Zhu, Yun, 2018. "The impact of accounting laws and standards on bank risks: Evidence from transition countries," Journal of Economics and Business, Elsevier, vol. 95(C), pages 103-118.
    • Handle: RePEc:eee:jebusi:v:95:y:2018:i:c:p:103-118
    DOI: 10.1016/j.jeconbus.2017.04.003
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