Evaluation of the Quality of Bank Accounting Data: Evidence from Equity, Bond and CDS Markets

Abstract

The financial crisis has raised again the importance of financial reporting in the banking sector. The core role of banks in the financial crisis stimulated the discussion and the analysis regarding the bank accounting quality. Aiming at contributing to this ongoing debate, the current study’s purpose is to evaluate the quality of bank accounting information. By using archival data from Equity, Bond, and CDS markets across 2005-2011 and correlating them with bank Loan Loss Provisions (LLP) this paper scrutinizes the relevance of bank financial figures. The empirical findings indicate that bank LLP is significant in explaining the variation in these markets. Furthermore, a significant difference in the relevance of accounting numbers between banks applying IFRS and US banks applying US GAAP is apparent. The results reveal also a substantial deviation in the effect of bank LLP before and after the crisis. As expected, bank LLP is more relevant to the decision making needs of CDS markets compared to equity and bond markets. Collectively, the empirical results render bank accounting information relevant to users’ decision making needs and is thus of good quality.