Premium
FOOL THE MARKETS? CREATIVE ACCOUNTING, FISCAL TRANSPARENCY AND SOVEREIGN RISK PREMIA
Author(s) -
Bernoth Kerstin,
Wolff Guntram B.
Publication year - 2008
Publication title -
scottish journal of political economy
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.4
H-Index - 46
eISSN - 1467-9485
pISSN - 0036-9292
DOI - 10.1111/j.1467-9485.2008.00462.x
Subject(s) - transparency (behavior) , economics , risk premium , bond , monetary economics , sovereignty , causality (physics) , creative accounting , financial market , european union , financial economics , accounting , accounting information system , international economics , finance , physics , quantum mechanics , politics , political science , law
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.