Accounting Conservatism Falls After Bank Deregulation

Sep. 29, 2022

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Sudipta Basu analyzes how the Interstate Banking and Branching Efficiency Act (1994), a series of reforms allowing banks to expand across state lines in a staggered manner, impacted borrower conservatism. The findings indicate that deregulation causes a decrease in conservatism.

Basu identifies several reasons for this causal relationship, including a shift in bargaining power in favor of borrowers. As competition increases amongst banks, borrowers can opt for lower quality auditors.

This study shows that conservatism in borrowers’ financial statements responds not only to rules set by standard setters such as the U.S. Financial Accounting Standards Board (FASB) and U.S. Securities and Exchange Commission (SEC), but also to market demands.