Does Accounting Enforcement Influence Risk-Taking in the Banking Industry? Evidence from the Pre- and Post-Crisis Periods

• In Event: Banking

Abstract

We examine the relationship between accounting enforcement and risk-taking in the banking industry. Using an international sample from 42 countries, we document that accounting enforcement is negatively related to bank risk-taking in the pre- while not in the post-financial crisis period. We also find that accounting enforcement enhances bank stability being negatively associated with troubled banks during the crisis. We explain these results by showing that accounting enforcement dampens reporting discretion in the just the pre-crisis period. Finally, we document that managers assume less risk through a more accurate examination of lending decisions (i.e., by reducing the quantity and enhancing the quality of loans) and a reduction in bank complexity. Our results confirm that formal institutions such as accounting enforcement influence bank reporting discretion and risk-taking.

Authors

• Lorenzo Dal Maso, Essec Business School

• Kiridaran Kanagaretnam, York University

• Gerald Lobo, University of Houston-Houston

• Francesco Mazzi, University of Florence