UPDATE:  The Audio for the discussion is available here.

One reason I was sad to miss this year’s JAE conference was that I didn’t have the chance to hear comments on “From Low-Quality Accounting to Financial Crises:  Politics of Disclosure Regulation Along the Economic Cycle“, by Jeremy Bertomeu and Bob Magee. From the abstract:

This paper models interactions between disclosure regulation and the economic cycle, within a positive framework in which politically-sensitive regulators respond to the demands of firms (borrowers) and banks (lenders). We show that accounting quality is lowest prior to a recession, as the increase in the stock of non-performing projects shifts political power toward those favoring less financial transparency. In turn, bad debt accumulates in banks, as lending activity, cost of debt and aggregate uncertainty all increase; as a result of lower financial transparency, the deterioration in project quality is not immediately reflected in market prices. When recessionary times become known, borrowers raise accounting quality to offset the deadweight cost of bad investments, leading to credit market contraction.

The next best thing to being there?  Come to the online Roundtable Tuesday, Nov 2 at 4pm-5pm ET for a conversation with Jeremy and Bob about this fascinating perspective on standard setting. The general “political economy” view is articulated in the opening paragraph of another of Jeremy and Bob’s papers, “Political Pressures and the Evolution of Disclosure Regulation“:

Most of existing research takes accounting regulations as part of an exogenously-given environment. Even though we commonly think about private choices as endogenously determined, most of this basic logic is absent when it comes to regulation. Being agnostic about regulatory choice, however, is at best unsatisfying and leaved unaddressed a number of fundamental questions as to why new regulations come to be, and what underlying economic forces shape them. Developing a more complete view of accounting institutions requires us to better understand regulatory actions and the constraints present in the environment in which they operate.

Join us!  Details for participation are here.

(UPDATE:  Link to the second paper added above.)

(UPDATE:  Slides are here.)