Financial disclosures in the European banking sector -An analysis of the Level 3 hierarchy

University essay from Göteborgs universitet/Företagsekonomiska institutionen

Author: Martin Bergström; Patrick Åkesson; [2011-06-29]

Keywords: ;

Abstract: Background:ThelargereorganisationoffinancialinstrumentsintheUSbankingsectorpriortotherecentfinancialcrisisandtheeffectsrelatedtothecrisis,raiseconcernsofsimilaraccountingdisclosuresinEurope.ThevaluationoftheLevel3financialinstrumentsisbasedonunobservableinputsandtheinstrumentsshallbevaluedattheirfairvalue,inwhichinformationasymmetrymaypresentitselfthroughthesubjectivityinthevaluationmechanism.Researchscope:ThestudyisbuiltonthenotionthatahighamountofLevel3financialinstrumentsresultsinahighercostofcapital.Inrelationtothemainobjectivewehaveincludedcontrolvariablesrepresentinganoverviewofabank’sbusiness.Thecontrolvariablesarealsosubjecttoanindepthanalysis.Researchdesign:ThecorrelationbetweenLevel3instrumentsandthecostofcapitalisexaminedthroughastatisticalresearch,usingCDSasaproxyforthecostofcapital.Thestudyconsistsofapproximately50listedbanksactivelyoperatingintheEuropeanUnion,reflectingalargeproportionoftheassetbasewithinthebankingsector.TheLevel3variableaswellasthecontrolvariablesisexaminedthroughalinearregressionanalysis.Limitations:ThestudyislimitedtobankswithintheEuropeanUnionastheyaresubjecttothesameeconomicregulation.TheamendmentstoIFRS7wereimplementedinJanuaryof2009andassuchthestudyencompassesbothoftheavailableyearsinordertoestablishasoundbaseofanalysis.Empiricalfindings:WefindnosignificantrelationshipbetweentheamountofLevel3financialinstrumentsandthebankscostofcapital.However,for2010themultipleregressionanalysispresentdepictsasignificantrelationshipregardingthecontrolvariablesaswellasexhibitingacorrelationtothecostofcapital.Furtherresearch:Weproposethatfutureresearchincludeinformationobservedoveralongerperiodoftimeaswellasexaminesanextendedeconomicalareaduetothedifferenceintheresultsreceived.

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