The study of Kanagaretnam, Lee, Lim, and Lobo (2017; hereafter, KLLL) investigates whether accounting-based risk measures from 2000−2006 are able to predict bank distress during the 2008−2009 financial crisis. In addition, KLLL examine the effect of informal institutions (societal trust, religiosity, and the media) on the predictive ability of accounting-based risk measures. The authors hypothesize that informal institutions enhance the quality of financial statements, thereby improving the ability of accounting-based risk measures to predict bank distress. Using an international banking sample, KLLL find a positive relation between accounting-based risk measures and bank distress. In addition, the relation between risk measures and bank distress is stronger for banks domiciled in countries with higher trust, religiosity, and media reach.
Given the critique regarding accounting-based risk measures (e.g., Kaplan 2011), KLLL's findings are important. I also think that the main research question—whether informal institutions affect the link between accounting-based risk measures...
