IDEAS home Printed from https://ideas.repec.org/a/ibn/ijbmjn/v13y2018i6p72.html
   My bibliography  Save this article

The Usefulness of Regulatory Capital for Investors’ Judgments in the Basel 3 Framework

Author

Listed:
  • Alessandro Mechelli
  • Vincenzo Sforza
  • Alessandra Stefanoni
  • Riccardo Cimini

Abstract

Value relevance studies assess how well accounting amounts reflect the market information that investors use for their economic decisions. Analysing a sample of 90 banks listed in 24 European stock markets, this study uses a price model (Ohlson, 1995) and provides evidence that a risk-sensitive metric like regulatory capital is more useful for investors’ decisions than book value of equity and that investors price the parts of regulatory capital that are devoted ideally to absorb losses differently due to the different risks taken. In particular, the part devoted to absorb losses due to credit risk is priced higher than the parts devoted to absorb other risks (e.g. market risks, operational risk). According to our evidence, this is due to the business model of the entities analysed, which are mostly retail and wholesale banks with significant credit exposure to clients and other banks. The paper adds to the literature and has implications for regulators and standard setters showing that the assessment and disclosure of regulatory capital not only strengthens the soundness and the stability of the international banking system (Basle Committee on banking supervision, 1988), but provides to investors useful information for their future investment strategies.

Suggested Citation

  • Alessandro Mechelli & Vincenzo Sforza & Alessandra Stefanoni & Riccardo Cimini, 2018. "The Usefulness of Regulatory Capital for Investors’ Judgments in the Basel 3 Framework," International Journal of Business and Management, Canadian Center of Science and Education, vol. 13(6), pages 1-72, April.
    • Handle: RePEc:ibn:ijbmjn:v:13:y:2018:i:6:p:72
    as

    Download full text from publisher

    File URL: http://www.ccsenet.org/journal/index.php/ijbm/article/download/73308/41638
    Download Restriction: no
    File URL: http://www.ccsenet.org/journal/index.php/ijbm/article/view/73308
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Asli Demirguc-Kunt & Enrica Detragiache & Ouarda Merrouche, 2013. "Bank Capital: Lessons from the Financial Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(6), pages 1147-1164, September.
    2. repec:dau:papers:123456789/2516 is not listed on IDEAS
    3. Alessandro Mechelli & Riccardo Cimini & Francesca Mazzocchetti, 2015. "Is regulatory capital more value relevant than book value of equity? A cross-country analysis," Applied Economics Letters, Taylor & Francis Journals, vol. 22(11), pages 900-903, July.
    4. Davidson, Russell & MacKinnon, James G, 1981. "Several Tests for Model Specification in the Presence of Alternative Hypotheses," Econometrica, Econometric Society, vol. 49(3), pages 781-793, May.
    5. repec:dau:papers:123456789/2814 is not listed on IDEAS
    6. Vuong, Quang H, 1989. "Likelihood Ratio Tests for Model Selection and Non-nested Hypotheses," Econometrica, Econometric Society, vol. 57(2), pages 307-333, March.
    7. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    8. Mary E. Barth & Greg Clinch, 2009. "Scale Effects in Capital Markets-Based Accounting Research," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3-4), pages 253-288.
    9. Mergaerts, Frederik & Vander Vennet, Rudi, 2016. "Business models and bank performance: A long-term perspective," Journal of Financial Stability, Elsevier, vol. 22(C), pages 57-75.
    10. Nicky J. Welton & Howard H. Z. Thom, 2015. "Value of Information," Medical Decision Making, , vol. 35(5), pages 564-566, July.
    11. Brown, Stephen & Lo, Kin & Lys, Thomas, 1999. "Use of R2 in accounting research: measuring changes in value relevance over the last four decades," Journal of Accounting and Economics, Elsevier, vol. 28(2), pages 83-115, December.
    12. Alessandro Mechelli & Riccardo Cimini, 2013. "Assessing value relevance of comprehensive income in European banks and other financial institutions," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2013(1), pages 13-41.
    13. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-838, May.
    14. Cantor, Richard, 2001. "Moody's investors service response to the consultative paper issued by the Basel Committee on Bank Supervision "A new capital adequacy framework"," Journal of Banking & Finance, Elsevier, vol. 25(1), pages 171-185, January.
    15. Jones, David, 2000. "Emerging problems with the Basel Capital Accord: Regulatory capital arbitrage and related issues," Journal of Banking & Finance, Elsevier, vol. 24(1-2), pages 35-58, January.
    16. Mary E. Barth & Greg Clinch, 2009. "Scale Effects in Capital Markets‐Based Accounting Research," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 36(3‐4), pages 253-288, April.
    17. Amer Demirovic & Dylan Thomas, 2007. "The Relevance of Accounting Data in the Measurement of Credit Risk," The European Journal of Finance, Taylor & Francis Journals, vol. 13(3), pages 253-268.
    18. Chan, Kam C. & Seow, Gim S., 1996. "The association between stock returns and foreign GAAP earnings versus earnings adjusted to U.S. GAAP," Journal of Accounting and Economics, Elsevier, vol. 21(1), pages 139-158, February.
    19. Kanagaretnam, Kiridaran & Mathieu, Robert & Shehata, Mohamed, 2009. "Usefulness of comprehensive income reporting in Canada," Journal of Accounting and Public Policy, Elsevier, vol. 28(4), pages 349-365, July.
    20. Elisabeth Dedman & Wei Jiang, 2015. "Dividends in China," Palgrave Macmillan Books, in: Douglas Cumming & Alessandra Guariglia & Wenxuan Hou & Edward Lee (ed.), Experiences and Challenges in the Development of the Chinese Capital Market, chapter 4, pages 68-88, Palgrave Macmillan.
    21. Lev, B & Zarowin, P, 1999. "The boundaries of financial reporting and how to extend them," Journal of Accounting Research, Wiley Blackwell, vol. 37(2), pages 353-385.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tsalavoutas, Ioannis & André, Paul & Evans, Lisa, 2012. "The transition to IFRS and the value relevance of financial statements in Greece," The British Accounting Review, Elsevier, vol. 44(4), pages 262-277.
    2. Alessandro Mechelli & Riccardo Cimini, 2013. "Assessing value relevance of comprehensive income in European banks and other financial institutions," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2013(1), pages 13-41.
    3. Taisier A. Zoubi & Feras Salama & Mahmud Hossain & Yass A. Alkafaji, 2016. "The Value Relevance of Components of Other Comprehensive Income When Net Income Is Disaggregated," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 19(04), pages 1-36, December.
    4. Alessandro Mechelli & Riccardo Cimini, 2021. "The effect of corporate governance and investor protection environments on the value relevance of new accounting standards: the case of IFRS 9 and IAS 39," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 25(4), pages 1241-1266, December.
    5. Edward M. Werner, 2011. "The value relevance of pension accounting information: evidence fromFortune200 firms," Review of Accounting and Finance, Emerald Group Publishing Limited, vol. 10(4), pages 427-458, November.
    6. Jeremiah Green & Henock Louis & Jalal Sani, 2022. "Intangible Investments, Scaling, and the Trend in the Accrual–Cash Flow Association," Journal of Accounting Research, Wiley Blackwell, vol. 60(4), pages 1551-1582, September.
    7. Harris, Mary S. & Muller III, Karl A., 1999. "The market valuation of IAS versus US-GAAP accounting measures using Form 20-F reconciliations1," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 285-312, January.
    8. Wu, Manhwa & Ni, Yensen & Huang, Paoyu, 2020. "Dividend payouts and family-controlled firms—The effect of culture on business," The Quarterly Review of Economics and Finance, Elsevier, vol. 75(C), pages 221-228.
    9. Alessandro Mechelli & Riccardo Cimini, 2014. "The value relevance of earnings and book value across the EU. A comparative Analysis," FINANCIAL REPORTING, FrancoAngeli Editore, vol. 2014(2-3-4), pages 83-113.
    10. Oliveira, Lídia & Rodrigues, Lúcia Lima & Craig, Russell, 2010. "Intangible assets and value relevance: Evidence from the Portuguese stock exchange," The British Accounting Review, Elsevier, vol. 42(4), pages 241-252.
    11. Demirovic, Amer & Tucker, Jon & Guermat, Cherif, 2015. "Accounting data and the credit spread: An empirical investigation," Research in International Business and Finance, Elsevier, vol. 34(C), pages 233-250.
    12. Veith, Stefan & Werner, Jörg R., 2014. "Comparative Value Relevance Studies: Country Differences Versus Specification Effects," The International Journal of Accounting, Elsevier, vol. 49(3), pages 301-330.
    13. Steve Fortin & Ahmad Hammami & Michel Magnan, 2021. "Re‐exploring Fair Value Accounting and Value Relevance: An Examination of Underlying Securities," Abacus, Accounting Foundation, University of Sydney, vol. 57(2), pages 220-250, June.
    14. Atoche, Teresa duarte & Pérez lópez, José ángel & Camúñez ruiz, Jose antonio, 2012. "La relevancia de los gastos de I+D. Estudio empírico en el sector del automóvil," Revista de Contabilidad - Spanish Accounting Review, Elsevier, vol. 15(2), pages 257-286.
    15. Palea, Vera, 2014. "Are IFRS value-relevant for separate financial statements? Evidence from the Italian stock market," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 23(1), pages 1-17.
    16. Palea, Vera & Scagnelli, Simone Domenico, 2014. "Do Earnings Reported under IFRS Improve the Prediction of Future Cash Flows? Evidence From European Banks," Department of Economics and Statistics Cognetti de Martiis. Working Papers 201443, University of Turin.
    17. Maigoshi, Zaharaddeen Salisu & Latif, Rohaida Abdul & Kamardin, Hasnah, 2018. "Change in value-relevance of disclosed RPT across accounting regimes: Evidence from Malaysia," Research in International Business and Finance, Elsevier, vol. 44(C), pages 422-433.
    18. Abdulrahman Alomair & Alan Farley & Helen Hong Yang, 2022. "The impact of IFRS adoption on the value relevance of accounting information in Saudi Arabia," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(2), pages 2839-2878, June.
    19. Koji Ota, 2010. "The Value Relevance of Management Forecasts and Their Impact on Analysts' Forecasts: Empirical Evidence From Japan," Abacus, Accounting Foundation, University of Sydney, vol. 46(1), pages 28-59, March.
    20. Sudipta Bose & Amitav Saha & Indra Abeysekera, 2020. "The Value Relevance of Corporate Social Responsibility Expenditure: Evidence from Regulatory Decisions," Abacus, Accounting Foundation, University of Sydney, vol. 56(4), pages 455-494, December.

    More about this item

    JEL classification:

    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ibn:ijbmjn:v:13:y:2018:i:6:p:72. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Canadian Center of Science and Education (email available below). General contact details of provider: https://edirc.repec.org/data/cepflch.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.