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

Jeremy Bertomeu and Robert P. Magee

Journal of Accounting and Economics, 2011, vol. 52, issue 2, 209-227

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.

Keywords: Business cycle; Regulation; Political economy; Credit crisis; Debt contracting; Accounting standards; Lobbying (search for similar items in EconPapers)
JEL-codes: D21 D72 E32 G21 K22 M41 M48 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:52:y:2011:i:2:p:209-227

DOI: 10.1016/j.jacceco.2011.08.005

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