Humboldt-Universität zu Berlin - Finance Group

Financial Markets Regulation (Ph.D. Course)

Wed. 10-12, DOR 1 Room 005

This course introduces students to the regulation of financial markets and the participants in these markets. It consists of three parts. The first two parts analyze the financial disclosure requirements of non-financial corporations and the impact of these requirements on corporate policies. The third part discusses the most relevant financial frictions that policy makers should consider when regulating financial institutions. Part IV reviews the economics of financial crises and discusses what regulatory mechanisms exist to prevent financial crises.


Prof. Dr. Joachim Gassen
Prof. Tim Adam, Ph.D.
Prof. Lutz Weinke, Ph.D.
Prof. Dr. Frank Heinemann

HU Chair of Accounting
HU Institute of Corporate Finance
HU Institute of Economic Policy
Technische Universität Berlin

Course Outline:

Part I: Financial Reporting and Disclosure

1. Financial Reporting and Disclosure: An Institutional Primer
Alexander, D. and C. Nobes (2010): Financial Accounting: An International Introduction. Financial Times Prentice Hall, 4th edition, chapter 1-5.
* Ball, R. (2001): Infrastructure Requirements for an Economically Efficient System of Public Financial Reporting and Disclosure. Brookings-Wharton Papers on Financial Services : 127-169.
Graham, J. C. Harvey and S. Rajgopal (2005): The economic implications of corporate financial reporting. Journal of Accounting and Economics 40: 3-73.

2. Regulated versus Voluntary Disclosure
Gao, P. (2010): Disclosure Quality, Cost of Capital, and Investor Welfare. The Accounting Review 85: 1-29.
* Hermalin, B. and M. Weisbach (2012): Information Disclosure and Corporate Governance. Journal of Finance 67: 195-234.
Beyer, A., D. Cohen, T. Lys and B. Walther (2010): The financial reporting environment: Review of the recent literature. Journal of Accounting and Economics 50: 296-343.

3. Financial Reporting and Mechanism Design
* Goldman, E. and S. Slezak (2006): An equilibrium model of incentive contracts in the presence of information manipulation. Journal of Financial Economics 80: 603-626.
Watts, R. and J. Zimmerman (1990): Positive Accounting Theory: A Ten Year Perspective. The Accounting Review 65: 131-156.

4. Financial Reporting and the Capital Market
Ball, R. and L. Shivakumar (2008): How Much New Information Is There in Earnings? Journal of Accounting Research 46: 975-1016.
* Lambert, R., C. Leuz and R. Verrecchia (2012): Information Asymmetry, Information Precision and the Cost of Capital. Review of Finance 16: 1-29
Hirshleifer, D. and Teoh, S. (2003): Limited attention, information disclosure, and financial reporting. Journal of Accounting and Economics 36: 337-386.

Part II: Recent Changes in Financial Markets Regulations

5. SOX
Peter Iliev, 2010, The Effect of SOX Section 404: Costs, Earnings Quality, and Stock Prices, Journal of Finance 65(3)
Chhaochharia and Grinstein, 2007, Corporate Governance and Firm Value: The Impact of the 2002 Governance Rules, Journal of Finance
Linck, Netter, and Yan, 2009, The Effects and Unintended Consequences of the Sarbanes-Oxley Act on the Supply and Demand for Directors, Review of Financial Studies
The Impact of the Sarbanes-Oxley Act on the Cost of Going Public
(Christoph Kaserer , Alfred Mettler , Stefan Obernberger)

6. Regulation FD
Information asymmetry, information dissemination and the effect of regulation FD on the cost of capital,
Jorion, Liu, and Shi, 2005, Informational effects of regulation FD: Evidence from rating agencies, Journal of Financial Economics

7. Rule12h-6
Doidge, Karolyi, and Stulz, 2010, Why Do Foreign Firms Leave U.S. Equity Markets? Journal of Finance
Fernandes, Lel, and Miller, 2010, Escape from New York: The market impact of loosening disclosure requirements, Journal of Financial Economics
Christensen, Hail, and Leuz, 2010, Capital-Market Effects of Securities Regulation: The Role of Implementation and Enforcement, working paper

Part III: Financial Frictions and Macroeconomics

Recent research on the role of financial frictions for macroeconomic analysis has developed frameworks suitable for quantitative analysis. This is needed since many of the issues involving the role of financial factors in the business cycle and the implications for regulatory policies ultimately involve quantitative considerations.

8. Financial Frictions in DSGE models I
A quick refresher on DSGE modeling, which is at center stage in the BDPEMS course “Advanced Macroeconomic Analysis”.

Galí, J., 2008, Monetary Policy, Inflation, and the Business Cycle, Princeton University Press.
Woodford, M., 2003, Interest and Prices: Foundations of a Theory of Monetary Policy, Princeton University Press.
Setting the stage for the subsequent analysis of financial frictions in the context of an otherwise standard macroeconomic framework.

9. Financial Frictions in DSGE models II
Should financial considerations be given independent weight in monetary policy decisions? How should interest-rate policy take into account the observed movements in interest-rate spreads? Does it make sense to shift the traditional focus on interest rate policy to bank reserves as an alternative operating target for monetary policy? Is credit policy a substitute for interest-rate policy?

Cúrdia, V. and M. Woodford, 2011, The central-bank balance sheet as an instrument of monetary policy, Journal of Monetary Economics 58, 54-79.

10. Financial Frictions in DSGE models III
We continue with our discussion of the above mentioned questions and give an overview of other recent developments in this field.

Gertler, M. and P. Karadi, 2011, A model of unconventional monetary policy, Journal of Monetary Economics 58, 17-34.

Part IV: Macroprudential Regulation of Financial Markets

* = required reading

11. Basic Mechanisms of Financial Crises
Allen, Franklin, and Douglas Gale (2009), Understanding Financial Crises, Oxford Univ. Press.
Kindleberger, Charles P., and Robert Z. Aliber (2005), Manias, Panics, and Crashes: A History of Financial Crises, 5th edition, Palgrave Macmillan.
Minsky, H.P. (1972), Financial Instability Revisited: the Economics of Disaster,
Reinhart, Carmen, and Kenneth Rogoff (2009): This Time is Different, Princeton Univ. Press.
* Abreu, D., and M. Brunnermeier (2003), “Bubbles and Crashes”, Econometrica 71, 173-204.
* Banerjee, A.V. (1992), “A Simple Model of Herd Behavior”, Quarterly Journal of Economics 152, 797-817.

12. Maturity Transformation and Systemic Risk
* Hellwig, M. (2008), “The Causes of the Financial Crisis“, CESifo Forum 9, 1- 21.
* Cooper, Russell W. (1999), Coordination Games: Complementarities and Macroeconomics, Cambridge University Press, Cambridge, UK, pp. x-xiii, 19-45, 126-131.
Milgrom, P. and J. Roberts (1990), “Rationalizability, Learning, and Equilibrium in Games with Strategic Complementarities,” Econometrica 58, 1255-1277.
Vives, X. (1990), “Nash equilibrium with strategic complementarities," Journal of Mathematical Economics 19, 305-321.
* Diamond, P, and P. Dybvig (1983), “Bank Runs, Liquidity and Deposit Insurance,” Journal of Political Economy 91, 401-419.
Obstfeld, Maurice (1996), “Models of Currency Crises with Self-Fulfilling Features,” European Economic Review 40, 1037-1047.

13. Capital Adequacy Requirements
* Brunnermeier, M., A. Crockett, C. Goodhart, A. Persaud, and H.S. Shin (2009), Geneva Report on the World Economy 11: The Fundamental Principles of Financial Regulation, International Center for Monetary and Banking Studies (ICMB), Genf.
* Bank for International Settlements (2006), Basel II: International Convergence of Capital Measurement and Capital Standards: A Revised Framework – Comprehensive Version, available at
Hellwig, M. (1995), “Systemic Aspects of Risk Management in Banking and Finance“, Schweizerische Zeitschrift für Volkswirtschaft und Statistik 131, 723 - 737.
Hellwig, M. (1998), “Banks, Markets, and the Allocation of Risks“, Journal of Institutional and Theoretical Economics 154, 328-351.
Brunnermeier, M., and L. Pedersen (2009), “Market Liquidity and Funding Liquidity, Review of Financial Studies 22, 2201-2238.
Adrian, T., and H.S. Shin (2010), “Liquidity and Leverage”, Journal of Financial Intermediation 19, 418-437.
Blum, J., and M. Hellwig (1995), “The Macroeconomic Implications of Capital Adequacy Requirements for Banks“, European Economic Review 39, 739 - 749.
* Cifuentes, R., G. Ferruci, and H.S. Shin (2005), “Liquidity Risk and Contagion” Journal of the European Economic Association 3, 556-566.

Lender of Last Resort
Hellwig, M. (1994), “Liquidity Provision, Banking, and the Allocation of Interest Rate Risk“, European Economic Review 38, 1363 - 1389.
* Rochet, J.-C.,and X. Vives (2004), Coordination Failures and the Lender of Last Resort: Was Bagehot Right after all? Journal of the European Economic Association 2, 1116-47.
* Diamond, D., and R. Rajan (2001), “Liquidity Risk, Liquidity Creation and Financial Fragility: A Theory of Banking.” Journal of Political Economy, 109, 287–327.
Fecht, F. and M. Tyrell (2004), "Optimal Lender of Last Resort Policy in Different Financial Systems", Deutsche Bundesbank.Discussion Paper 39/2004.