The Effect of Timely Loan Loss Recognition in the Banking System on Firms’ Debt Structure
The Effect of Timely Loan Loss Recognition in the Banking System on Firms’ Debt Structure
Date
2018-08-30
Authors
Li, Xiao
Ng, Jeffrey
Saffar, Walid
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Abstract
In this paper, we examine how the system under which banks record loan losses,
specifically, the timeliness of loan loss recognition, affects borrowers’ debt
structure. Using data from 55 countries, we find that more timely loan loss
recognition reduces firms’ reliance on bank debt relative to public debt. This
result reflects an equilibrium in which firms in an economy rely less on bank
debt when there are greater lending constraints and more borrower monitoring
in a more timely loan loss accounting regime. Consistent with such a regime
resulting in tighter loan conditions, we find an even lower use of bank debt in
countries with stringent bank supervision and among financially constrained
and opaque firms. Overall, our study offers new insight into the real effects of
banks’ accounting on firms’ debt structure when firms can choose alternative
debt providers.
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Timeliness,
Loan loss recognition,
Bank debt
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