Information Asymmetry and Discretionary Accounting in European Banks
Abstract
Recent theoretical research suggests that information risk is a non-diversifiable risk
factor and should therefore affect the cost of capital of the individual firm. This study
investigates this notion for listed European banks during the period 2005-2015. I use
two measures based on the level and uncertainty of discretionary accounting choices to proxy information risk and investigate the effect on the information asymmetry component of banks' cost of capital. I study the effects on the equity market, proxied by bid-ask spreads and stock volatility, and the credit market, proxied by bond and
CDS spreads. The results show that the level of discretionary accounting affects
information asymmetry on the equity market, mainly through the effect on bid-ask
spreads. Additional tests suggest that these effects are solely generated by the level
of discretionary loan loss provisions. I find some evidence that the uncertainty
in the level of discretionary accounting has a similar effect on the equity market,
however these results are weak to alternative model specifications. I am unable to
empirically support any effect on the credit market. My results should be of interest
to standard-setters to ensure that financial accounts provide information that support
investors' decisions. The results also suggest that banks are able to lower their cost of
equity capital by providing high quality information.
Degree
Master 2-years
Other description
MSc in Accounting
Collections
View/ Open
Date
2016-09-15Author
Eliasson, Simon
Keywords
Information asymmetry
discretionary accounting
earnings management
capital markets
nancial institutions
Series/Report no.
Master Degree Project
2016:30
Language
eng