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

Yiwei Fang, James Fornaro, Lingxiang Li and Yun Zhu

Journal of Economics and Business, 2018, vol. 95, issue C, 103-118

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.

Keywords: Accounting law; Bank risk; Transition economies; Institutional development (search for similar items in EconPapers)
Date: 2018
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