1. The Influence of Supervision and Regulation on the Conservatism of Bank Financial Reporting: International Evidence
Yuanchen Chang
National Chengchi University
Hsiangping Tsai
K.C. John Wei
Hong Kong University of Science and Technology
200612

2. Introduction Scandals for financial institutions
Fannie Mae, 2004; Fortress Re, 2004; Livedoor, 2006
Conservative financial reporting strengthens CG
Watts (2003a, 2003b); Bushman et al. (2005)
Institutional factors & management incentives
Law origin: Ball et al. (2000)
Insider communication and Political intervention: Ball et al. (2003), Bushman and Piotroski (2005)
Listing status: Ball and Shivakumar (2005), Nichols et al. (2005)

3. Effects of regulation and supervision practices
Powerful regulatory supervisors vs. empowering private sector monitoring
Barth et al. (2004), Beck et al. (2005)
Supervisory monitoring
Berger and Davies (1998), DeYoung et al. (2001), Gunther and Moore (2003)
Private sector discipline
Martinez Soledad and Schmukler (2001), Demirgüç and Huizinga (2004), Caprio and Honohan (2004), Flannery (1998)

4. Research questions
Are banks around the world conservative in their financial reporting?
What institutional factors contribute to improve bank incentive to be conservative in financial reporting and strengthen banking governance?
Direct government supervision and regulation policies
Indirect government policies that encourage private sector monitoring

5. Methodology
Q1: Are banks around the world conservative in their financial reporting?
Earnings changes
Loan loss reporting
(-)
(+)

6. Methodology
Q2: What institutional factors contribute to improve bank incentive to be conservative in financial reporting?
SUP related index
CAR (?)
SUPPWR: (-)
CORRPWR, RESTRPWR, INSLVNPWR
PRI monitor related index
PUB (-)
PRIIDX: (-)
DEPOINSUR, BKDISCL
AUDIT, LBKRATE

7. Data and sample selection
Data sources
BANKSCOPE: bank level data
Commercial law origin: La Porta et al. (2002)
Bank supervision and regulation variables:
the bank regulation and supervision database (the 2003 edition) supplied by the World Bank
Sample countries
Step1: La Porta et al. (2002) → 92 countries
Step2: control for the availability of bank regulation & accounting information →48 countries

8. Financial reporting conservatism by public and private banks across 48 countries: pooled results

9. Findings and conclusions (1)
Using pooled data from 48 countries, we show that banks, especially public banks, are conservative in their financial reporting
A greater tendency of earnings reversal for negative earnings changes than for positive earnings changes
Incorporate more loan loss provisions
when their operating cash flows decrease, or
When their problem loans increase
Charge off more problem loans when their loan loss provisions increase.

10. Effects of governance mechanisms on conservative reporting of earnings changes

11. Effects of governance mechanisms on conservative reporting of loan losses

12. Findings and conclusions (2)
The cross-country comparison shows
Bank conservatism in financial reporting is more pronounced in countries where
Supervisors are more empowered to apply adequate actions on banks
Private sector players are more encouraged to monitor banks

13. Findings and conclusions (3)
Bank supervision and regulation practices, rather than legal origins, are more important in explaining international differences in the conservatism of financial reporting among banks.