Evaluating the Economic Impact of Accounting Regulation on Global Financial Markets During Crises

Abstract

The purpose of this study is to evaluate the important relationship between accounting regulatory frameworks and global financial stability, with particular emphasis on how accounting regulations impact market conditions during times of financial distress. The key issue in the discussion is the regulatory dilemma, since while transparency is crucial in ensuring effective markets, stringent accounting systems such as fair value accounting have been blamed for intensifying the cyclical nature of financial crises. Using a quantitative approach, this paper utilizes the DiD model of econometrics to evaluate panel data of 40 countries during two crisis periods; the Global Financial Crisis of 2008 and the COVID-19 pandemic. The results show that the effects of regulation are very much situation-dependent. While during the banking crisis of 2008, strict implementation of FVA served as a volatility enhancer, which was reflected through higher asset write-offs and lower capital adequacy, in contrast, during the exogenous crisis of COVID-19, high-quality disclosure became a means of building confidence in the markets and helped reduce information asymmetries, leading to a statistically significant reduction in volatility during the pandemic, although this effect varies by jurisdiction. The main contribution of this paper is to propose a theoretical comparison between the existing theories of pro-cyclicality and transparency, showing that regulation effectiveness is largely dependent on the crisis type. This helps in providing an actionable strategy for policymakers in implementing flexible regulations that will help the global accounting standard be dynamic in responding to different economic crises.