Forecasting recessions is important for many stakeholders including households, investors, businesses, and policymakers. The existing literature (e.g., Harvey, 1988, 1989) has shown that the Treasury yield curve contains information about future economic growth. Specifically, the slope of Treasury yield curve, the spread between long- and short-term interest rates forecasts National Bureau of Economic Research (NBER) recessions (e.g., Estrella and Hardouvelis, 1991; Estrella and Mishkin, 1998). In this study, we focus on bank liquidity creation as a forecasting variable for NBER recessions. Monetary policy is generally altered to change bank liquidity creation and it further changes the slope of the yield curve. If monetary policy aims to change how banks create liquidity, then bank liquidity creation is likely to contain information about the real economy and may help predict recessions.1 However, while banks play a central role in virtually all financial crises (e.g., Diamond and Rajan, 2005), the existing banking literature does not investigate the relationship between bank liquidity creation and recessions. Using the Berger and Bouwman (2009) bank liquidity creation measure, we find that bank liquidity creation contains information about the onset of NBER recessions. Bank liquidity creation contracts up to four quarters prior to recessions and continues to fall for approximately five quarters past recessions. We further show that bank liquidity creation significantly improves the ability of the term spread to forecast recessions. The existing literature linking bank lending and economic activity provides inconclusive evidence of a ―credit crunch‖ (e.g., Bernanke and Lown, 1991; Kashyap and Stein, 1994). One potential reason for the inconclusive results is that for reputational reasons, commercial banks act as a buffer for long-standing customers with pre-arranged credit lines, which is an off-balance sheet bank activity (e.g., Thakor, 2005). In this study, we investigate both on- and off-balance sheet bank liquidity creation prior to recessions since banks’ inability to manage their balance sheet is believed to be the root cause of the most recent financial crisis. Berger and Sedunov (2015) study the relationship between bank liquidity creation and economic development at the U.S. state level. They find that higher bank liquidity creation in the present quarter leads to higher per capita GDP for the next quarter.

Beyond its stated objective of representing the economic reality of business transactions, accounting can also act in a reverse manner. This observation is encapsulated in the phrase by Hines (1988) which states that: “in communicating reality we construct reality”. This constructivist interpretation of accounting has been investigated in the accounting literature by various authors who often refer to “postmodern” thinkers (e.g. Chiapello and Baker, 2011). For example, Jean Baudrillard’s theoretical notion of “hyperreality” has been applied to the notions of income and capital, which can be seen as self-referential signs where “the map begets the territory” (Macintosh et al., 2000, p. 32). Interestingly, however, this theoretical approach has resulted in little or no field-based empirical research. The present paper aims to fill this gap by providing an empirical example of the impact of accounting standards on the economic decisions of field managers. In our study, the field managers are corporate treasurers. In specific terms, we investigate how a mandatory change in accounting standards for derivative instruments – principally IAS 39 and IFRS 9 (IASB, 2010) – has redefined the accounting “model” (i.e. the accounting standards) that must be followed when preparing the “map” (i.e. accounting results) of the economic “territory” (i.e. economic decisions). Our research provides support to those who argue that international accounting standards mandating fair value accounting have had a negative pro-cyclical impact on the real economy1 . Our study provides some support for this thesis in that we find an impact on corporate treasurers’ economic decisions arising from accounting standards. The impact appears to be related to a fear of earnings volatility. In addition, we find a complex and nuanced process, with heterogeneous behaviors and dynamic learning processes. Once they have acquired agility in dealing with the new accounting standards, some treasurers are in a position to engage in earnings management to reduce earnings volatility.