We utilize the time period over which banking authorities discussed, adopted, and implemented Basel III to examine the financial reporting and operational decisions firms use to respond to proposed regulation. Our primary finding is that the banks affected by this proposal made strategic financial reporting changes and altered their business models prior to the regulation being enacted. Further, our results indicate a sequential response to the proposed regulation as these banks responded through the financial reporting channel prior to making the business model changes targeted by the regulation. Finally, and consistent with market discipline having a strong influence on bank behavior, we provide evidence that publicly traded banks were quicker to respond to the proposed regulation. Taken together, our findings provide new insight into whether, when, and how firms respond to proposed regulatory changes.
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