Mandatory Disclosure, Finance and Growth
Final Report Abstract
The objective of the proposed research was to examine whether the introduction of IFRS in numerous countries around the world fosters economic growth. The motivation for this research stemmed from the goal of national regulators by mandating IFRS to improve capital allocation, and as a consequence economic performance. While there is a relatively large number of studies analyzing economic consequences of IFRS adoption on the firm-level, evidence on the macro-level effects of IFRS adoption has been scarce. Although the research theme is topical, unfortunately during the process of revising and improving my research proposal I realized that a working paper very closely related to my topic had already been circulated on SSRN. Therefore, based on cost-benefit considerations, I decided not to further pursue my originally proposed research. In order to maximize the benefit of my stay at Wharton, I developed and refined a new research idea that has been approved by several scholars of the Accounting Department of the Wharton Business School. In particular, I aim to investigate whether certain aspects of fair value accounting, less scrutinized by the public, provided bank management with excessive risk taking behaviour. Critics of fair value accounting identify the inconsistent implementation and subsequent application of accounting standards, particularly regarding fair value measurement, as a potential contributor to the financial crisis. However, strong empirical evidence on this relationship is missing, potentially because the scope for manipulation of fair value measurement was limited. I investigate whether the consistent application of fair value recognition standards and the interaction with bank regulatory requirements enabled management to engage in excessive risk taking. In particular, I posit that the special accounting and regulatory treatment of unrealized gains and losses of available for sale (AFS) securities enabled banks to manage earnings and regulatory capital, and in turn, to reduce regulatory discipline. Because the largest portion of fair valued assets is classified as AFS, related economic effects are likely to be larger.
