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Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia

Kerstin Bernoth () and Guntram Wolff

No 2006,19, Discussion Paper Series 1: Economic Studies from Deutsche Bundesbank

Abstract: We investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. Our model predicts that risk premia contained in government bond spreads should increase in both, the official fiscal position and the expected "creative" part of fiscal policy. The relative importance of these two signals depends on the transparency of the country. Greater transparency reduces risk premia. The empirical results confirm the hypotheses. Creative accounting increases the spread. The increase of the risk premium is stronger if financial markets are unsure about the true extent of creative accounting. Fiscal transparency reduces risk premia. Instrumental variable regressions confirm these results by addressing potential reverse causality problems and measurement bias.

Keywords: Risk premia; government bond yields; creative accounting; stock-flow adjustments; gimmickry; transparency (search for similar items in EconPapers)
JEL-codes: E43 E62 F34 G12 H6 (search for similar items in EconPapers)
Date: 2006
New Economics Papers: this item is included in nep-fin, nep-fmk, nep-mac and nep-pbe
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https://www.econstor.eu/bitstream/10419/19647/1/200619dkp.pdf (application/pdf)

Related works:
Journal Article: FOOL THE MARKETS? CREATIVE ACCOUNTING, FISCAL TRANSPARENCY AND SOVEREIGN RISK PREMIA (2008) Downloads
Working Paper: Fool the Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia (2006) Downloads
Working Paper: Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia (2006) Downloads
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