Bank Accounting Regulations, Enforcement Mechanisms, and Value Relevance of Financial Statements

• In Event: Breakfast with Research Roundtable Forum Session

Abstract

Using a sample of major banking institutions in 37 economies, we show that the value relevance of earnings and book values is higher in countries with stricter bank accounting regulations and countries with stronger enforcement mechanisms. This finding suggests that superior bank accounting regulations and enforcement mechanisms enhance the credibility of financial reporting and disclosures by banking institutions, which allows investors to better incorporate accounting numbers into the stock pricing process. In addition, we find that the effects of bank accounting regulations are more pronounced in countries with strong enforcement, suggesting that stronger enforcement is complementary to bank accounting regulations in achieving higher value relevance of financial statements. Our study has important policy implications for bank regulators.

Author

• Liang Song, Michigan Tech University