Showing papers in "Accounting and Business Research in 2015"
TL;DR: The authors provides a commentary on the academic literature on accounting conservatism with a view to highlighting the insights of that literature that are potentially useful for accounting stand-archers, and provides a discussion of the benefits of accounting conservatism.
Abstract: This paper provides a commentary on the academic literature on accounting conservatism with a view to highlighting the insights of that literature that are potentially useful for accounting standar...
101 citations
TL;DR: Visual forms constitute representation (incremental information) or construction (impression management) or both. as discussed by the authors defines the visual broadly to include pictures, photographs, film, architecture, diagrams, advertisements and web pages that appear in a wide variety of documentary and geographical locations.
Abstract: This paper offers the first wide-ranging review and synthesis of visual research in accounting. It aims to shape, order and evaluate the field for the first time. Visual forms are important to accounting because of their power and their ubiquity in an increasingly visual society. Visual forms constitute representation (incremental information) or construction (impression management) or both. The paper defines the visual broadly to include pictures, photographs, film, architecture, diagrams, advertisements and web pages that appear in a wide variety of documentary and geographical locations. It encompasses papers that examine a wide range of issues (from impression management, visual rhetoric, professional identity, gender and diversity to corporate social responsibility, intellectual capital, myth and religion). First is an overview of the ‘visual turn’ in contemporary society, critical thought and accounting. The second part brings together for the first time a wide range of work on the visual in account...
93 citations
TL;DR: In this paper, the authors analyzed the relationship between real and accrual earnings management activities and IPO failure risk, and found that firms with high levels of real and/or accrued earnings management during the IPO year have a higher probability of IPO failure and lower survival rates in subsequent periods.
Abstract: This paper analyses the relationship between real and accrual earnings management activities and IPO failure risk. While the association between accrual earnings management and IPO failure has been researched in a limited setting, to date, there has been no work that analyses the impact of real activities-based manipulation on the probability of IPO failure. Based on a sample of 570 UK IPO firms that went public over the period 1998–2008, we find evidence that IPO firms manipulate earnings upward utilising real and accrual earnings management during the IPO year. We also find that IPO firms with high levels of real and/or accrual earnings management during the IPO year have a higher probability of IPO failure and lower survival rates in subsequent periods. In addition, we find that IPO firms experience a higher probability of IPO failure and lower survival rates in the post-IPO period when greater real earnings management takes place during the IPO as compared to accrual earnings management. While our wor...
75 citations
TL;DR: In this article, the International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) is increasingly being adopted in a number of jurisdictions, and the authors find that countries that are not capable of developing their own local generally accepted accounting principles are more likely to adopt IFRS for small and medium-sized entities.
Abstract: The International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs) is increasingly being adopted in a number of jurisdictions. Despite the economic importance of non-publicly accountable entities, little is known about what factors influence countries' decisions to adopt IFRS for SMEs. In a unique sample of 128 countries, we find that countries that are not capable of developing their own local generally accepted accounting principles are more likely to adopt IFRS for SMEs. We also provide evidence that in jurisdictions where full IFRS have been applied to private firms, the likelihood of adoption of IFRS for SMEs increases, suggesting that jurisdictions reduce the financial reporting burden on SMEs. Moreover, in line with prior literature, there is evidence that countries with a relatively low quality of governance institutions are more likely to adopt this new set of accounting standards. The results also hold under alternative measures and different estimation approaches...
71 citations
TL;DR: In this paper, the authors examined the extent to which different forms of control (i.e., value systems, diagnostic control systems and interactive control systems) are directly associated with distinct phases of innovation processes.
Abstract: This paper yields insights into the channels through which management accounting and control systems (MACS) exert an influence on product innovation by examining the extent to which different forms of control (i.e. value systems (VS), diagnostic control systems and interactive control systems (ICS)) are directly associated with the distinct phases of innovation processes. Using survey data collected from 118 medium and large Spanish companies, we find that (1) VS and ICS have significant main effects on the creativity, co-ordination and knowledge integration, and filtering (sub-)phases of innovation processes and (2) the significance and direction of these influences vary depending on the entrepreneurial orientation (EO) of firms. By highlighting the relevance of EO in shaping the influence of MACS on product innovation processes, this study calls for caution in generalising the expected effects of MACS on innovation.
65 citations
TL;DR: This article used publicly available data to provide direct evidence about the role of qualitative characteristics (QCs) of financial information in managements' accouc... and showed that QCs played an important role in management decision making.
Abstract: This is the first empirical study that uses publicly available data to provide direct evidence about the role of the qualitative characteristics (QCs) of financial information in managements’ accou...
63 citations
TL;DR: In this paper, the authors argue that financial accounting is inherently conservative, in that a neutral application of the International Accounting Standards Board's definition of (net) assets leads to book value being less than economic value.
Abstract: The argument in this paper is that financial accounting is inherently conservative, in that a neutral application of the International Accounting Standards Board (IASB's) definition of (net) assets leads to book value being less than economic value. There are both conceptual and practical reasons for this outcome, neither of which is explained by an intention to be conservative, by an asymmetry or bias that is designed to lead to a conservative outcome. Financial accounting is not a system for the neutral measurement of economic value. Book value and economic value are instead conceptually different, with conservatism resulting from that difference. This inherent conservatism seems to have been overlooked both by the IASB and by its critics. The IASB has sought to remove prudence from its framework and has attracted criticism from the academic and practitioner communities for doing so. Yet the challenges to the framework implied by adopting an agency-based, contracting demand for prudent accounting are cr...
49 citations
TL;DR: In this article, a longitudinal analysis of leakage performance, a strategic and stakeholder issue in the water industry, by all 10 water and sewerage companies (WASCs) in England and Wales over the 7-year period 2005-2006 to 2011-2012 is presented.
Abstract: This paper aims to determine whether corporate reporting practice, consistent with impression management, changes depending upon company performance. A longitudinal analysis, rarely used in prior impression management research, enables changes in annual report disclosures, both narrative and visual, to be identified and considered relative to a company's performance. Our analysis is based upon the disclosure of leakage performance, a strategic and stakeholder issue in the water industry, by all 10 water and sewerage companies (WASCs) in England and Wales over the 7-year period 2005–2006 to 2011–2012. Our longitudinal data are also compared across companies and contrasted with the expert counter account provided by the industry regulator, OFWAT. We find that the level, nature and presentation of a WASC's leakage disclosures change markedly reflective of their performance against OFWAT's target. Our evidence shows that the changes in reporting practice include the use of tactics and presentational methods c...
49 citations
TL;DR: In this paper, a conceptual comparison between the "mainstream strategic management accounting" literature, the "accounting and strategising" literature and "strategic management accounting (SMA) in close inter-organisational relationships" is made.
Abstract: This paper provides a conceptual comparison between the ‘mainstream strategic management accounting’ literature, the ‘accounting and strategising’ literature and ‘strategic management accounting (SMA) in close inter-organisational relationships’. It concludes that ‘SMA in close inter-organisational relationships’ shares some important characteristics with the ‘accounting and strategising’ literature. Important differences were found, too, though. These mainly concerned the need to understand individuals working for close partners as preparers of strategic information; the need for disaggregated accounting information about unique connections to close partners and about the role of indirect benefits that follow from close connections and the need for the company to not only collect information but also disperse diverse information within close inter-organisational relationships. Through an intensive case study of a global robot manufacturer, Robotics, this paper also provides novel empirical evidence on ‘S...
48 citations
TL;DR: In this paper, the authors explore the evolving role of accounting information in allocating capital and explore how accounting can be used to control conflicts of interest in organizations (stewardship role).
Abstract: I explore the evolving role of accounting information in allocating capital. Accounting arose to control conflicts of interest in organizations (stewardship role). The industrial revolution spawned capital-intensive firms and public capital markets with dispersed shareholders to finance these firms. The regulation of these public capital markets shifted the role of accounting toward providing investors with information for making informed investment decisions (valuation role). With the advent of the semiconductor and global competition, emerging and public firms today differ from their predecessors in fundamental ways. Exploiting the information technologies created by the semiconductor, twenty-first century firms are now more knowledge based, have more intangible assets, are more reliant on their employees’ human capital, confront increased competition, and face diverse conflicts of interests and hence different challenges accessing capital than their forerunners. Responding to the demands of twenty-firs...
37 citations
TL;DR: In this article, the authors investigated the process of how XBRL was institutionalized and offered insights on how institutional arrangements emerge and become relevant as heterogeneous organizations consider adopting accounting innovations while evidence concerning their benefits is unavailable.
Abstract: By integrating and streamlining financial information within and among various organisations, eXtensible Business Reporting Language (XBRL) has been developed with a view to enhancing the efficiency, accuracy, and transparency of corporate accounting information. Taking an inter-organisational focus, this paper investigates the process of how XBRL was institutionalised. It explains and offers insights on how institutional arrangements emerge and become relevant as heterogeneous organisations consider adopting accounting innovations while evidence concerning their benefits is unavailable. The original and overall contribution of this study is that it improves current understanding of coal-face actors' perceptions, behaviours, and strategies as they interact in the organisational field and become engaged in developing accounting innovations to produce the macro-level observations documented in existing institutional theory studies.
TL;DR: In this article, a cost accounting initiative in a Sri Lankan hospital is examined, and the societal relevance of management accounting is examined based on a bottom-up analysis, from micro events in the hospital to policymaking at the level of the Provincial Council.
Abstract: Taking Modell's [(2014) The societal relevance of management accounting: an introduction to the special issue. Accounting and Business Research, 44 (2), 83–103] ‘societal relevance of management accounting’ agenda forward, and based on a cost accounting initiative in a Sri Lankan hospital, this paper examines how management accounting is implicated in societal relevance. It reports on a post-colonial neoliberal state's use of cost-saving experiments and the resultant emancipation of the individuals involved. It conducts a bottom-up analysis, from micro events in the hospital to policymaking at the level of the Provincial Council. This analysis suggests that cost accounting acts as a mediating instrument: it begins to loosen the old Keynesian post-colonial bureaucratic budget confinements, creates a social space for individuals to consider cost-saving experiments, and addresses wider policy concerns about hospital resource management. The story is illuminated by Gilles Deleuze's and Zigmund Bauman's ideas ...
TL;DR: In this paper, the authors investigate the role of intellectual capital information (ICI) in sell-side analysts' fundamental analysis and valuation of companies and find that ICI is used to form analysts' perceptions of the overall quality, strengths and future prospects of companies, in deriving valuation model inputs; in setting price targets and making investment recommendations; and as an important and integral element in analyst-client communications.
Abstract: This paper investigates the role of intellectual capital information (ICI) in sell-side analysts’ fundamental analysis and valuation of companies. Using in-depth semi-structured interviews, it penetrates the black box of analysts’ valuation decision-making by identifying and conceptualising the mechanisms and rationales by which ICI is integrated within their valuation decision processes. We find that capital market participants are not ambivalent to ICI, and ICI is used: (1) to form analysts’ perceptions of the overall quality, strengths and future prospects of companies; (2) in deriving valuation model inputs; (3) in setting price targets and making investment recommendations; and (4) as an important and integral element in analyst–client communications. We show that: there is a ‘pecking order’ of mechanisms for incorporating ICI in valuations, based on quantifiability; IC valuation is grounded in valuation theory; there are designated entry points in the valuation process for ICI; and a number of factors affect analysts’ ICI use in valuation. We also identify a need to redefine ‘value-relevant’ ICI to include non-price-sensitive information; acknowledge the boundedness and contextuality of analysts’ rationality and motives of their ICI use; and the important role of analyst–client meetings for ICI communication.
TL;DR: This article explored how fund managers continue to do their job when on one level they know they cannot all be exceptional, and they do this by telling stories, constructing satisfying narratives to explain to themselves, as well as others, why their investments work out and providing equally plausible reasons for when they underperform.
Abstract: This paper explores how fund managers continue to do their job when on one level they know they cannot all be exceptional. They do this by telling stories, constructing satisfying narratives to explain to themselves, as well as others, why their investments work out and providing equally plausible reasons for when they underperform. Using the story typology of Gabriel (2000. Storytelling in Organizations: Facts, Fictions, and Fantasies. Oxford: Oxford University Press.) – epic, tragic, comic and romantic, we explore two sets of fund manager narratives. First, we analyse the transcripts of interviews with 50 equity fund managers in some of the world's largest investment houses. Second, we examine a similar number of published fund manager reports to their investors. In both cases, we show how storytelling is used by asset managers to make sense of what they do and justify their value to themselves as well their clients and employers. Similar processes are employed in both sets of narratives, one verbal and...
TL;DR: In this paper, the development of the concept of capital is investigated, focussing on accounting and related disciplines, especially in the UK, and the conventional accountants view was re-established in 1980 because of an EU Directive.
Abstract: The word ‘capital’ has many meanings, within and beyond business. In accounting, it was originally a credit concept but has many uses related to assets. In economics and tax, it has exclusively asset meanings. This paper investigates the development of the concept of capital, focussing on accounting and related disciplines, especially in the UK. Even as a credit term, ‘capital’ can be as narrow as original equity or wide enough to include debt. A credit/debit confusion can be seen in Pacioli's treatise and through to recent documents by standard setters. At various dates, amounts called ‘capital’ have been shown on different sides of the balance sheet. Capital maintenance is central to the measurement of income for various purposes. It was thrown off course in 1889 by a legal case which seems to have been influenced by the double-account system, which also had echoes in economics. However, the conventional accountants’ view was re-established in 1980 because of an EU Directive. Maintenance of capital (bot...
TL;DR: In this article, the use of repetition, both in narrative and visual forms, in social and environmental reports is investigated, and it is argued that the rationale for distinguishing between the different forms of repetition can be linked to their different potential or intensity in acting on different stimuli with a view to enhance learning.
Abstract: This paper focuses on the use of repetition, both in narrative and visual forms, in social and environmental reports. It investigates the forms of repetition as a rhetorical device adopted by the preparer of a social and environmental report in helping the process of knowledge acquisition, as outlined by Hume (1739). Drawing from Hume’s (1739) philosophical idea of an ‘impression’, and the work of Davison (2014a) we classify repetitions into ‘identical’, ‘similar’ and ‘accumulated’ forms. It is argued that the rationale for distinguishing between the different forms of repetition can be linked to their different potential or intensity in acting on different stimuli with a view to enhance learning. The empirical element of this study is based on the stand-alone social and environmental reports of a sample of 86 cooperative banks in Northern Italy; the analysis of these reports indicates that repetition is widespread and that cooperative banks use all forms of repetition, albeit to a varying extent within the different reported themes. The paper contributes to the literature by offering an alternative interpretation of repetition using an interdisciplinary perspective and by providing new insights on social and environmental reporting practices in the cooperative banking sector.
TL;DR: In this article, the authors examined whether three international accounting classification systems relating to equity financing, law and culture still had merit as measured on transition to IFRS and explore whether they are effective in grouping accounting systems.
Abstract: The international accounting classification literature emphasises the importance of understanding how institutional factors shape accounting regulations and practices. With the mandatory adoption of International Financial Reporting Standards (IFRS) in the European Union and Australia in 2005, our empirical study examines whether three international accounting classification systems relating to equity financing, law and culture still had merit as measured on transition to IFRS and explore whether they are effective in grouping accounting systems. Using IFRS as the yardstick, we find statistically significant differences in the measurement of shareholders’ equity as between strong (Class A) versus weak (Class B) equity financing systems, common law versus code law systems and cultural systems based on ‘Anglo’, ‘Nordic’ and ‘More Developed Latin’ cultural groups. With regard to the measurement of net income, however, we find statistically significant differences only in respect of strong (Class A) versus weak (Class B) equity financing systems. Our findings demonstrate that traditional international accounting system differences still persisted at the time of IFRS adoption even after long periods of harmonisation and growing international accounting convergence.
TL;DR: In this article, account-related narratives are found in various media, and written by various stakeholders. Preparer-created narratives are now acknowledged as a crucial component of the business reporting pack.
Abstract: Accounting-related narratives are found in various media, and written by various stakeholders. Preparer-created narratives are now acknowledged as a crucial component of the business reporting pack...
TL;DR: It is concluded that the development of IFRSs will continue to be the outcome of professional debate, negotiation, consensus seeking and political influence and it is recommended that additional measures should be taken to ensure coherence in the development and application of standards after implementation of a new CF.
Abstract: In this paper we evaluate the International Accounting Standards Board's (IASB) efforts, in a discussion paper (DP) of 2013, to develop a new conceptual framework (CF) in the light of its stated am...
TL;DR: In this paper, the authors analyse the annual report narratives of the Edinburgh Magdalen Asylum, a reformatory for "fallen" women, and find that the narratives were employed to discharge the directors' accountability by portraying their work and the asylum as socially and economically useful, accounting for the inmates in their charge, securing funding and finding suitable employment for inmates after release.
Abstract: We analyse the annual report narratives, between 1801 and 1914, of the Edinburgh Magdalen Asylum, a reformatory for ‘fallen’ women. We aim to provide new insights by combining interdisciplinary perspectives: the work of Erving Goffman on stigma, asylums, impression management and framing, and writings on literary genres, in particular eighteenth- and nineteenth-century fiction. We also contribute to research on the annual report as source material for social history and to accounting histories of women. We find that the narratives were employed to discharge the directors’ accountability by portraying their work and the asylum as socially and economically useful, accounting for the inmates in their charge, securing funding and finding suitable employment for inmates after release. The narratives and their subjects were framed in accordance with conventions of sentimental novels and recurring literary plot structures. By creating a dichotomy between victims of seduction and ‘hardened’ prostitutes, the direc...
TL;DR: The authors examined the association between behavioural earnings thresholds and causal language intensity on earnings-related outcomes in annual management commentary reports and found that failure firms tend to use more causal language in a weaker information environment.
Abstract: We examine the intensity of management's performance justification as a remedial narrative impression management device, by investigating the association between behavioural earnings thresholds and causal language intensity on earnings-related outcomes in annual management commentary reports. Not meeting key earnings thresholds, such as positive earnings, positive earnings change and analyst earnings consensus, is argued to be a significant accountability predicament to which firms tend to respond with more intense use of causal language on performance in order to mitigate expected negative consequences of these events. Our results document a significant positive association between failure to meet earnings thresholds and causal language intensity. Moreover, we find that failure firms (not meeting earnings thresholds) tend to use more causal language in a weaker information environment. In addition, we document that firms that miss key earnings thresholds and use more causal language experience a less vol...
TL;DR: In this paper, the authors respond to mixed evidence on the decision-usefulness of annual report disclosures for derivative financial instruments to capital market participants, and concerns identified by practice, and respond to the concerns identified in practice.
Abstract: Responding to mixed evidence on the decision-usefulness of annual report disclosures for derivative financial instruments to capital market participants, and concerns identified by practice, this p...
TL;DR: In this article, a negative association between management ownership and the demand for auditor services was found for first-generation private family firms, but only for first generation private families, and this relation turns positive for subsequent generation private family firm due to entrenching behaviour caused by weakened altruistic feelings between the family shareholders.
Abstract: Former audit demand studies generally consider wholly family-owned private firms as a homogeneous group of firms that incur minimal agency costs. Family firm literature, however, argues that these firms might incur significant agency costs as well and we therefore examine audit demand in this particular type of firm. As we examine private family firms from the USA, which have no audit requirement, we broaden the concept of audit demand to the demand for auditor services, which encompasses audits, reviews and compilations. Consistent with former audit demand studies, we hypothesise a negative association between management ownership and the demand for auditor services, but only for first-generation private family firms. We hypothesise that this relation turns positive for subsequent generation private family firms due to entrenching behaviour caused by weakened altruistic feelings between the family shareholders. Our results support this hypothesis, but only regarding the demand for reviews and compilation...
TL;DR: In this article, the authors adopt a lens of new materialism to analyse narratives of managers in the arts sector in response to the master narrative of austerity and proposed "solutions" using business models.
Abstract: The paper adopts a lens of new materialism to analyse narratives of managers in the arts sector in response to the master narrative of austerity and proposed ‘solutions’ using business models (incl...
TL;DR: In this paper, a methodology of national accounting that responds to the needs of governments when they engage in sustainability and policy analyses is presented, and it is shown that these needs would be served only if national accounts were directed at estimating the economy's wealth (which is the social worth of an economy's entire stock of capital assets), not growth in gross domestic product or improvements in the many ad hoc indicators of human development.
Abstract: In this paper, I review – and to an extent further develop – a methodology of national accounting that responds to the needs of governments when they engage in sustainability and policy analyses. Those needs would be served only if national accounts were directed at estimating the economy's wealth (which is the social worth of an economy's entire stock of capital assets), not growth in gross domestic product or improvements in the many ad hoc indicators of human development that have been proposed in recent years. Concurrently, I show that by poverty, we should mean a low level of wealth, not income, and that the distribution of human well-being ought to be judged in terms of the distribution of wealth, not income or education, or any of the several indicators that are currently in use. I show that the concept of wealth invites us to extend the notion of assets and the idea of investment well beyond conventional usage. This perspective has radical implications for the way national accounts are prepared an...
TL;DR: In this paper, the history of double-entry bookkeeping is examined in the context of the scientific revolution, a time when complete obedience to the scriptures and classical authorities came under challenge from the systematic pursuit of knowledge based on reasoning, critical questioning, and the establishment of clear relationships between cause and effect.
Abstract: James Dodson FRS devised a new way of teaching double-entry bookkeeping based on deductive logic, and he employed this method of scientific analysis to require recognition of assets and changes in their value in the absence of prior market transactions. This paper is designed to advance knowledge of accounting history by demonstrating diversity in the history of accounting thought and by revealing how it can be influenced by new ways of thinking gaining credence within the wider contemporary environment. Understanding of the history of double-entry bookkeeping is broadened and deepened by locating Dodson's treatise within the context of the scientific revolution; a time when complete obedience to the scriptures and classical authorities came under challenge from the systematic pursuit of knowledge based on reasoning, critical questioning, and the establishment of clear relationships between cause and effect.
TL;DR: In this paper, the authors used data collected from trading statements from a pre-MAD pre-IMS year and used these statements to predict which IMSs are genuinely incremental firm announcements and not simply substitutes for otherwise disclosed trading statements.
Abstract: In 2004 the Transparency Directive increased the reporting frequency by mandating the Interim Management Statement (IMS). However, only nine years later, the EU announced that it was making quarterly reporting voluntary again, arguing that IMSs are redundant as they are unlikely to contain any additional information not already required by the Market Abuse Directive (MAD). The current paper tests this argument empirically. For that it collects data on trading statements from a post-MAD pre-IMS year and uses these statements to predict which IMSs are genuinely incremental firm announcements (‘incremental IMSs’) and not simply substitutes for otherwise disclosed trading statements (‘non-incremental IMSs’). It then calculates three-day abnormal return variability and abnormal trading volume associated with incremental and non-incremental IMSs and it makes three observations. First, the introduction of IMSs coincided with a substantial reduction in other trading statements consistent with a large substitution...
TL;DR: In this article, reflections on the failure of The Equitable Life Assurance Society are given. But they do not consider the role of financial institutions in the collapse of this financial institution.
Abstract: This paper offers reflections on the failure of The Equitable Life Assurance Society. Noting that the collapse of this financial institution precipitated a raft of official inquiries, we provide a ...
TL;DR: In this paper, the authors investigate the relationship between narrative sentiment in analysts' company reports and their recommendation and target price outputs, and find that themed sentiments impact upon analysts' outputs, but their magnitude and direction vary over the precrisis, crisis and post-crisis periods.
Abstract: The aim of this paper is to investigate the relationship between narrative sentiment in analysts' company reports and their recommendation and target price outputs. We study an industry-balanced sample of 275 UK quoted company sell-side analyst reports over the period 2006–2010 using a content analysis methodology to measure net sentiment for a range of themes. We then model analysts' outputs against themed sentiment scores to analyse the impact of the Global Financial Crisis. We find that themed sentiments impact upon analysts' outputs, but their magnitude and direction vary over the pre-crisis, crisis and post-crisis periods. In particular, before the crisis we find a strong negative relationship between the macroeconomic and regulatory environment and report outputs, though this effect diminishes somewhat with the onset of the crisis, to be restored thereafter. Growth sentiment exerts a weak positive impact before the crisis which disappears thereafter. Financial performance sentiment becomes a signifi...
TL;DR: In this article, the authors pointed out that deviations between the accounting and regulatory concepts of equity capital have gone too far, and that it does not make sense to mark-to-market when there are no markets during times of crisis.
Abstract: The global financial crisis has highlighted that deviations between the accounting and regulatory concepts of equity capital have gone too far. Accounting standards have been going too far in the application of fair value accounting. If there are no markets during times of crises, it does not make sense to mark-to-market. These exceptions have now been included in the accounting standards. At the same time, regulatory capital has gone astray by allowing debt elements, such as subordinated debt, to be incorporated, which did not absorb losses during the crisis. The new Basel III capital framework is rightfully reinforcing the central role of equity capital. While the special liquidity function of banks may justify lower levels of capital than those of industrial firms, the social cost of bank failures (externalities) requires higher levels than the extremely low levels of bank capital before the crisis. The level of regulatory capital has been increased, with a systemic surcharge for the large banks, to re...