Session on Information and Transparency

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2. Focal Issue: How Do Changes in Accounting Rules Affect Financial Institutions? . Does Enhanced

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´╗┐September 15, 2006 sixth Annual FDIC-JFSR Research Conference Session on Information and Transparency Discussion by Edward J. Kane Boston College

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Central Issue: How Do Changes in Accounting Rules Affect Financial Institutions? Does Enhanced "Bookkeeping Disclosure" Increase Transparency and Stability ? Since the Degree of Information Asymmetry is a Managerial Decision Variable, Does Expanding Disclosure Requirements Merely Force Malevolent Insiders (Where They Exist) to Hide Threaded Needles of Information Inside an Even Larger Haystack of Disinformation?

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I . Paper by Rocco Huang concentrates essentially on: the connection between's two intermediary files: 1. Nier's 17-variable file of an association's bookkeeping instruction (AI) . 2. LLorente, Michaely, Saar, and Wang's record of private data exchanging (PIT) . What's more, on how these factors relate with bank-particular factors and nation level files of supervisory power (SP) . Excluded Variables : No thought of nation level measures of boss' authorization innovation or forced legitimate punishments for disregarding central laws and controls. [Example of token $1 fines for surpassing 55 mph in Montana in 1970s and mid 1980s.]

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Modeling ISSUES 1. Just PIT is displayed as an endogenous variable ; AI and SP are most certainly not. 2. PIT is the yield of an earlier relapse , so it has its own particular blunder term . (PIT is the "incline shifter" in a relapse of the shape: y = a + (b + cV)x + u. Since coefficient standard blunders are downplayed, routine t-values incredibly exaggerate the genuine importance of such factors. 3. PIT is forcefully translated. All the more basically , it is a measure of market liquidity in essence . 4. Particularly where insider exchanging is illicit, insiders would be more quick witted to do their exchanging credit default swaps and different subsidiaries markets.

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Sampling and Interpretation Issues 1. Representativeness : What is the factual populace? Consideration in Datastream and the benevolent macroeconomic period of 2003-2005 breaking points reach of discoveries. 2. Potential Heckman Bias : Most nation level factors might be considered as coming about endogenously from sectoral bartering in the political economy. Given his minimal t-values, the creator ought to test for this specifically. For instance, for switch causation from AI to SP. The more profound approach question is "The reason does society direct banks?", as well as "Why do banks in a given nation allow themselves to be controlled and specifically ways?"

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NIER Paper Uses a halfway bigger and mostly littler dataset than Huang. More banks (550) More years (1994-2000), yet no covering. Less nations (32). Gigantic specimen sizes (N = upwards of 2500) raise issue of Lindley Paradox. Same 17-Variable Disclosure Index (AI) as Huang. Endogenous variable is a zero-one "individual-bank emergency pointer" c(i, t). Emergency is characterized as a stock return in the 5% bring down trail of the dispersion of yearly value returns over all banks and years in the specimen.

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Probit Model * of c(i, t) Pr[c(i, t) = 1] is made an element of chose: 1. Macroeconomic Variables 2. Bank-Level Variable 3. Basic Variables a. Straightforwardness (slacked AI) b. Store Insurance Characteristics 4. Time Trend * Hazard models could deal with patterns better. [5. Endogeneity of AI is Investigated in a Two- Stage Framework. Proof of Simultaneous- Equation Bias Emerges: Negative Coefficient Assigned to AI Becomes Almost Twice as Large!!]

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Main Findings: AI Has Negative Sign Unlimited Deposit Insurance Coverage Has a Positive Sign Main Criticism : Need to expel concurrent condition predisposition. Not just has AI and DI scope been appeared to be endogenous, yet Hovakimian, Laeven, and a third creator (JFSR, 2003; 390 banks, 56 nations, 1991-1999) demonstrate by means of a Heckman show that it is essential to take into account the endogeneity of DI configuration components and connection them to nation attributes before finishing up anything about their impacts on bank-level factors.

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Additional Criticisms 1. Need to set harder noteworthiness levels for tests of this size. 2. Need to research the misuse of stock-value data incorporated with the marker definition. Could attempt to clarify GARCH-sort models of return unpredictability. 3. Need to accomplish more with concurrence.

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Beatty Paper Focuses on two 2003 changes in the Accounting Treatment of one Instrument: Trust Preferred Securities (TPS) . This instrument was designed particularly for banks as a gadget to help impose and administrative weights from capital prerequisite. Without anyone else, the principal bookkeeping change solidified the legitimateness of the tax break . Neither one of the changes modified the administrative advantage . Issue: Did Accounting Change in How TPS Were Reported Affect Future TPS Issuance?

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Two Kinds of Statistical Tests Differences in Means of Two-Year "Issuance Indicator" Before and After the Accounting Change For Subsamples of BHC That Fall on One Side or Another of Selected Conditioning Variables a. Test Composition : Pre-Change N Post-Change N b. Comes about : Many contrasts are critical just in the pre-period. 2. Total Probit Regression of marker on Predetermined Conditioning Variables, With Slope-Shifts For Post-Period. a. Test included 905 issuances and 10,449 non-issuances. b. Comes about : Three-slant fakers are noteworthy: Public obligation and negative-impose positive. Four others are not noteworthy. Issuances: 806 107 Non-Issuances: 1,314 1,475

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Criticism: Post Hoc Ergo Proper Hoc The paper produces proof of an administration change in issuance . Be that as it may, it doesn't appear: 1. That there is precisely one administration change and that 2003 is the best place to find the exchanging point. 2. Regardless of whether different changes in bank or financial specialist situations (e.g., the impacts of other assessment and administrative occasions) may clarify the move.