Banking reform, risk-taking, and accounting quality : Evidence from post-Soviet transition states
Fang, Yiwei; Dbouk, Wassim; Hasan, Iftekhar; Li, Lingxiang (01.12.2014)
JulkaisusarjaBOFIT Discussion Papers
JulkaisijaBank of Finland
Julkaisun pysyvä osoite onhttps://urn.fi/URN:NBN:fi:bof-201411243343
The drastic banking reform within Central and Eastern Europe following the collapse of the Soviet Union provides an ideal quasi-experimental design to examine the causal effects of institutional development on accounting quality (AQ). We find that banking reform spurs significant improvement in predictive power of earnings and reductions in earnings smoothing, earnings-inflating discretionary provisions, and avoidance of reporting losses. These effects hold under alternative model specifications and after considering concurrent institutional developments. In contrast, corporate reform shows no such effects, refuting the alternative explanation that unobserved factors affect both reform speed in general and the quality of financial reporting. We further identify four specific reformative actions that are integral to the drastic banking reform process where prudential regulation contributes the most to the observed AQ improvement. It supports the conjecture that banking reform improves AQ by reducing banks’ risk-taking behaviors and, as a result, their motive behind accounting manipulation.
A revised version published on 7 November 2022 replaces the BOFIT DP 19/2014 titled "Banking reform, risk-taking, and earnings quality – Evidence from transition countries”