Fool the Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia

By Kerstin Bernoth, Guntram B. Wolff. Social Science Research Network, 2006

232 citations recorded by the source corpus.

We investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. We find that two different measures of creative accounting indeed both increase the spread. The increase of the risk premium is stronger, if financial markets are unsure about the true extent of creative accounting. Moreover, fiscal transparency reduces risk premia. Instrumental variable regressions confirm these results by addressing potential reverse causality problems and measurement bias.

Subfields: Economics and Econometrics, Finance

View Paper: https://www.semanticscholar.org/paper/ffa92bb5d5eb42fe735c84805247ee947eb566ad

Citations in the corpus

• The Determinants of Sovereign Bond Yield Spreads in the EMU (2012, unknown): “(2004), Bernoth and Wolff (2008), Manganelli and Wolswijk (2009) and Schuknecht et al.”
• Banking and Sovereign Risk in the Euro Area (2010, unknown): “Bernoth and Wolff (2008) document that sovereign bond markets also react to hidden fiscal policy items, the ”creative accounting” as defined in von Hagen and Wolff (2006) and Koen and van den Noord (2005). Moreover, they document that governments/countries with greater transparency index scores pay ”
• Rules and risk in the Euro area (2014, unknown): “…the policy failures due to which budget process outcomes tend to be biased towards deficits: namely, the common pool problem of governments without centralised spending powers, the short-term orientation of governments due to short electoral cycles, and the possible short-term orientation of”
• The EMU sovereign-debt crisis: Fundamentals, expectations and contagion (2012, unknown): “However, the prevailing view can be summarised as follows: First, the international risk factor was important in determining spreads against Germany (see Codogno et al. (2003), Geyer et al. (2004), Longstaff et al. (2007), Barrios et al.”
• Sovereign bond yield spreads: A time-varying coefficient approach (2012, unknown): “Ejsing and Sihvonen (2009) show that there is a highly significant relationship between bidask spreads, trading volume and the log issue size for German and French bond markets. Korajczyk and Sadka (2008) find that there is a common component among different measures of liquidity, which in turn sugg”