Do accounting changes affect the economic behaviour of financial firms?

Anne Beatty
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Anne Beatty: Ohio State University - Department of Accounting & Management Information Systems

No 211, BIS Working Papers from Bank for International Settlements

Abstract: This study examines whether accounting changes result in changes in the economic behaviour of financial institutions. The results of several papers examining how banks respond to accounting changes that affect their regulatory capital ratios are consistent with Furfine's (2000) summary that "capital regulation, broadly speaking, can significantly influence bank decision-making." These papers do not attempt to disentangle the effects of capital regulation versus market discipline. This paper examines banks' response to recent changes in accounting for Trust Preferred Securities that effect how these securities are reported in the balance sheet but do not change the calculation of Tier 1 capital. This provides a good setting to examine whether accounting changes induce changes in banks' economic behaviour in the absence of an effect on regulatory capital. I test five hypotheses related to banks' decisions to issue Trust Preferred Stock during the period from 1997 through 2004. Specifically, I examine whether there was an overall decrease in banks' propensity to issue these securities after the accounting change, whether publicly traded banks and those that access the external debt markets were more likely to issue these securities before the accounting change but not after, and whether banks with low regulatory capital ratios and with high marginal tax rates were more likely to issue these securities both before and after the accounting change. The results suggest that accounting changes can lead to changes in banks' economic behaviour even when the change in accounting does not affect regulatory capital calculations. This is consistent with bank managers acting as if they are concerned with the markets' response to the numbers reported after the accounting change.

Keywords: Bank capital; taxation; trust preferred securities; financial reporting (search for similar items in EconPapers)
JEL-codes: G21 G32 M41 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2006-08
New Economics Papers: this item is included in nep-acc, nep-ban, nep-cfn, nep-his and nep-reg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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