Market Discipline in the Banking Sector: Evidence from the IFRS 9 Adoption

This paper investigates the use of fair value accounting in the banking industry and the overall related capability of the financial statements to adequately reflect a firm’s equity value from a market valuation perspective. The debate surrounding this issue is multifaceted, involving academics, standards setters, and market participants, and is further complicated by the significant externalities induced by reporting standards, including the impact on third pillar information. In light of the societal and economic ramifications discussed in the introduction, such as the pervasive influence of market mechanisms and the crucial interplay between market dynamics and contractual tools, our study seeks to assess the value relevance of IFRS 9 implementation in banks, and its role in bridging the gap between book and market values of equity. Given that the balance sheets of these entities can be analogized to a security portfolio largely composed of selfgenerated illiquid assets, the study posits that accounting information, when it maintains a predicted association with the market value of equity as per the criteria outlined by Barth et al. (1994; 1996; 2001), is deemed to be valuerelevant. A confirmation of this hypothesis would imply that investors regard the accounting information as both relevant and reliable, reflected in a closer alignment between the book and market values of equity.