Abstract
We examine whether and how banks’ risk disclosure relates to their risk taking behavior. Effective from 2007, International Financial Reporting Standards No. 7 (IFRS 7) requires the disclosure of risk arising from financial instruments, which enhances bank risk disclosure. Using a difference-in-differences analysis, we document a significant decrease in bank risk taking following IFRS 7 adoption. This effect is more prominent when accounting rules are more strictly enforced and alternative bank risk constraining means are weak. We also find that after IFRS 7 adoption, banks are more prudent in loan offering that helps reduce risk. Overall, our results are consistent with the market discipline view of bank risk disclosure and underscore IFRS 7′s role in improving financial stability.
Original language | English |
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Article number | 107225 |
Journal | Journal of Accounting and Public Policy |
Volume | 46 |
Early online date | 7 Jun 2024 |
DOIs | |
Publication status | Published - 1 Jul 2024 |
Bibliographical note
Publisher Copyright:© 2024 Elsevier Inc.
Funding
The authors thank Marco Trombetta (editor) and two anonymous reviewers for valuable comments. Chong Wang and Feng (Harry) Wu acknowledge research supports from Hong Kong Polytechnic University and Lingnan University, respectively. All errors are our own.
Keywords
- Bank risk taking
- IFRS 7
- Risk disclosure