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ItemDeposit Insurance and Discretion in Loan Loss Provisioning( 2022)Deposit insurance (DI) shifts claims on bank liabilities from depositors to the insurer. It also induces moral hazard, leading banks to take more risks. Both forces affect stakeholder incentives and, consequently, should influence bank accounting. This paper studies how a recent, substantial expansion in DI coverage impacts a key accounting policy: discretion in banks’ loan loss provision (LLP). We compare affected and exogenously unaffected banks using propensity-score-matched difference-in-differences. Banks that experience an increased DI ceiling post more positive discretionary LLP, suggesting a capital-reducing or conservative bent. Results are strongest for banks most exposed to the shock, those subject to the most regulatory scrutiny, and those that increase risk most. Our findings are consistent with regulatory pressure to recognize losses proactively, suggesting regulatory preferences shape financial reporting. We are the first to estimate how DI impacts bank accounting.
ItemHuman judgments of executive teams’ human capital( 2022)We provide the first large-sample evidence on whether human-generated judgments of the human capital of a firm’s executive team are informative about future performance. Using a novel dataset from the banking industry, we find that banks with better human capital have fewer future non-performing loans and are less likely to fail. These results are robust to holding the overall ex-ante health of the bank constant and including bank fixed effects. We further find that better human capital is associated with more intense loan monitoring and timelier loan loss recognition. Finally, we find that the association between human capital and future performance is amplified when perceived human capital diverges from the bank’s overall performance and when macroeconomic uncertainty is higher.
ItemFragmented Securities Regulation, Information-Processing Costs, and Insider Trading( 2022)Using a unique setting where stand-alone banks submit filings to bank regulators instead of the SEC, we examine the consequences of fragmented securities regulation on information-processing costs and opportunistic insider trading. We find the market reaction to insider-trading filings on FDICconnect is less timely than to those on SEC EDGAR, suggesting FDICconnect generates higher information-processing costs. We also find only large investors trade more on insider-trading filings on FDICconnect than on those on SEC EDGAR, thus extracting benefits from the delayed market reaction to insider-trading filings on FDICconnect. Finally, we find increased insider selling in stand-alone banks prior to public announcements of banks’ enforcement actions and negative earnings news, suggesting insiders’ opportunistic use of private information. These findings collectively suggest regulatory fragmentation undermines market efficiency and distorts the level playing field.
ItemCurrent Expected Credit Losses (CECL) Standard and Banks’ Information Production( 2022)We examine whether the adoption of the current expected credit losses (CECL) model, which reflects forward-looking information in loan loss provisions, improves banks’ information production. We find that CECL adopting banks’ loan loss provisions are timelier and better reflect future local economic conditions. Consistent with these outcomes resulting from better information production, we find that CECL adopting banks have fewer loan defaults and disclose more forward-looking information after adopting CECL. In addition, the improvement in the quality of loan loss provisions is greater for banks that invest more in CECL-related information systems and human capital, a plausible channel for improved information production. Finally, CECL adopters’ lending becomes less sensitive to economic uncertainty. Our findings suggest that banks benefit from better information quality by adopting a more forward-looking accounting standard.