Loan Loss Measurement and Bank Lending
solo-authored
R&R at Journal of Accounting Research
I use both theoretical and empirical models to assess how alternative measurement approaches to banks’ loan loss allowances affect lending when banks are subject to regulatory capital requirements. I find that: (1) the Current Expected Credit Loss (CECL) method increases loan loss allowances on average by 16% relative to the Incurred Credit Loss (ICL) method; (2) the difference between CECL loan loss allowances and ICL loan loss allowances is larger in economic downturns than upswings; (3) banks reduce lending on average by 3.15% (50 basis points) when switching from ICL to CECL; and (4) CECL results in less procyclical lending than ICL, specifically, the difference between lending in up- vs. downturns decreases by 0.8% (37 basis points) when moving from ICL to CECL. Accounting for Goodwill
with Charles McClure
R&R at Journal of Accounting Research
Currently, goodwill is not amortized but tested annually for impairment. When managers care about earnings, goodwill's accounting treatment can have large effects on future earnings and may influence how much a manager will bid for a target. We quantify the effects of goodwill accounting by estimating a structural model of corporate takeovers. Our estimates suggest that accrual accounting increases buyout premia by an average of nearly 10 percentage points. If firms needed to amortize goodwill over 10 years, we estimate premia would reduce by 6 percentage points and M&A volume would shrink by 4.29% or $68.6 billion per year. Furthermore, the fraction of private equity acquirers increases by 7.74 percentage points, shifting control over productive assets to the private and financial sector. Our results suggest the accounting treatment for goodwill has a meaningful effect on the market for corporate control. The Role of Decentralized Budgeting in Public Procurement Efficiency
with Marco Errico, Delphine Samuels and Anthony Welsch
R&R at Journal of Accounting and Economics
This study examines the role of own-source tax revenue in disciplining local government spending. We ask whether the Italian Imposta Municipale Unica (IMU) tax reform of 2012, which replaced national transfers with local property taxes, affected local government cost management. We find that municipalities more affected by the reform paid significantly less for public works after the reform without incurring greater delays in contract execution or cost overruns. We also find evidence that the cost savings resulted from local officials achieving greater price discounts and awarding more contracts to non-local vendors. Consistent with increased accountability explaining the improvements in cost savings, our results are stronger for municipalities with incumbent mayors facing re-election.Information Flows in Trading Networks
with Edward Watts and Christina Zhu
R&R at Journal of Accounting and Economics
We study the informational value of trading networks in over-the-counter (OTC) markets. Using detailed transaction-level data from the corporate bond market, we show that investors with larger dealer trading networks make superior trading decisions before changes in credit fundamentals and yield better risk-adjusted performance. Our evidence indicates that an important mechanism for this result is that dealers reward their trading clients with private information. Consistent with this mechanism, we show that investors make superior trading decisions when they have trading relationships with dealers likely to have novel information. In addition, investors with trading relationships with deal-affiliated dealers transact more profitably before important merger and acquisition (M&A) deals are publicly announced. Collectively, our evidence highlights the importance of trading relationships for investors' private information acquisition.