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Efficient Capital Markets, Inefficient Firms: A Model of Myopic Corporate Behavior
Quarterly Journal of Economics
This paper examines risk-taking incentives in banks under different accounting regimes with capital regulation. In the model the bank's decisions of capital issuance and investment policy are jointly determined. Given some exogenous minimum capital requirement, lower-of-costor-market accounting is the most effective regime that induces the bank to issue more excess equity capital above the minimum required level and implement less risky investment policy. However, the disciplining role ofdoi:10.2307/2937861 fatcat:4ht7prfyljffxj3xvzxv6sfrxe