Why Did Politicians Blame Fair Value Accounting during the Financial Crisis? The Role of Conservative Ideology and Special Interests

Accounting

Speaker:Jannis Bischof, Goethe University, Frankfurt
Date: Wednesday 8 February 2017
Time: 14:30 - 16:00
Location: Kolade Teaching Room, Building One

Further details

Abstract

In response to public pressure during the financial crisis, the FASB relaxed fair value accounting rules in April 2009. We investigate the involvement of U.S. congresspersons in the fair value debate preceding this regulatory change. Using public opposition to fair value accounting as a proxy for political pressure on the FASB, we find that the likelihood of a politician’s involvement in the accounting debate is positively associated with both the politician’s conservative ideology and financial connections to the financial services industry. We document that conservative politicians pushed for fair value relaxation as an alternative to government bailouts during the early phase of the debate when they brought the issue on the FASB’s agenda. Later, however, when the potential design of the new accounting rules became more precise, politicians’ involvement in the debate is more strongly associated with the potential benefits of politically connected financial institutions from the April 2009 relaxation. While the finding is consistent with politicians catering to special interest of the financial industry, the results also point to politicians’ ideology playing into the design of accounting rules when these rules are linked to controversial regulatory actions.