Rimmy E. Tomy

Threat of entry and the use of discretion in banks' financial reporting

Journal of Accounting and Economics, 2019, 67(1), 1-35

Abstract:

This paper studies managers' use of accounting discretion to deter entry. Using state-level changes in branching regulation under the Interstate Banking and Branching Efficiency Act, I find geographically-constrained community banks increased their loan loss provisions to appear less profitable when faced with the threat of entry by competitors. Additional tests rule out alternative explanations that firm economics or regulators drove the increase. I complement my analyses with survey-based evidence. Findings from the survey confirm that banks prefer to locate in markets where incumbents have high profitability and low credit losses, and that banks use competitors' financial statements to analyze competition.

Supporting materials: 

As part of this study, I conducted a survey of community bankers. Details related to the survey can be found in Appendix A of the paper, as well as here: Competition in Community Banking Survey

The survey instrument can be found here: Survey Instrument

Media:

• "Do Companies Camouflage Their Results to Scare Off Competitors?," Chicago Booth Review,  April 19, 2017
  
  

Observing Enforcement: Evidence from Banking  (with Anya Kleymenova)

Journal of Accounting Research, 2022, 60(4), 1583-1633

Abstract:

This paper finds that the disclosure of supervisory actions by bank regulators is associated with changes in their enforcement behavior. Using a novel sample of enforcement decisions and orders (EDOs) and a change in the disclosure regime, we find that regulators issue more EDOs, intervene sooner, and rely more on publicly observable signals following the regime change. EDO documents become longer, more complex, and contain more boilerplate language. Our results also indicate that intervention happens sooner and more frequently in counties with higher news circulation, which suggests that regulators take into account the public perception of their actions. We evaluate potentially confounding factors, including the savings and loan (S&L) crisis and competition from thrifts, and find robust results. We also study bank outcomes and document that uninsured deposits decline at EDO banks in the disclosure regime, especially for those covered in the news. Finally, we observe that bank failure accelerates despite improvements in capital ratios and asset quality. Overall, our research provides new insights on the disclosure of regulatory actions.

Supporting materials: 

The online appendix can be found here: Online Appendix

Awards:

• 2019 Bureau Van Dijk Best Paper Award in Banking,  Sydney Banking and Financial Stability Conference

• 2020 EFA Best Paper Award

Media: 

• "Banking Regulators Operate Differently under Public Scrutiny," Chicago Booth Review,  October 01, 2020
  
  

Bank Supervision and Organizational Capital: The Case of Minority Lending (with Byeongchan An, Robert Bushman, Anya Kleymenova)

Journal of Accounting Research, 2024, 62(2), 505-549

Abstract:

Racial disparities in mortgage lending have important welfare implications. We investigate whether improvements in banks’ organizational capital and associated control systems facilitate increased lending to minority borrowers. We focus on bank supervisors’ enforcement decisions and orders (EDOs) against banks, which can enforce changes in banks’ internal processes, procedures, and management practices. We hypothesize that EDO-imposed improvements in loan policies, internal governance, and employee training mitigate deficiencies in credit assessments and lending decisions that previously disadvantaged minority borrowers. We find that relative to white borrowers, mortgage lending to minority borrowers significantly increases following the resolution of EDOs, where this positive effect increases with the strictness of bank supervisors and the severity of the EDO. Using a semi-supervised machine learning method to analyze and quantify the text of EDOs, we find that increases in minority lending are significantly higher for EDOs specifying revisions of loan policies, implementation of formal internal governance procedures, or more employee training,  especially in areas with a high proportion of subprime borrowers. Overall, we find that EDO-driven improvements in organizational capital generate unintended, positive social externalities that enhance access to credit for minority borrowers.

Supporting materials: 

The online appendix can be found here: Online Appendix

Media: 

• "How Fixing Troubled Banks Can Help Minorities and Women," Chicago Booth Review,  October 03, 2022

• Insights/Research Brief,  Becker Friedman Institute, February 23, 2023
  
  

Trust in Banks and Borrower Behavior: Evidence from Supervisory Actions and Local Information Quality (with Samuel Chang and Jizhou Wang)

Working paper

Abstract:

We find that trust plays a significant role in retail borrowers' decisions to transact with banks, and that the local news media plays an important role in shaping this trust. We utilize bank enforcement actions publicized in the local news media as a shock to bank reputation that undermines consumers' trust in banks. Survey data indicate that enforcement actions are associated with significant declines in trust in banks and bankers. Using granular loan data from TransUnion that links retail borrowers to banks, we find that originated loans and new borrowers are of lower quality while an enforcement action is open. These effects are not present prior to the enforcement action, indicating that declining borrower and loan quality are not the reasons for enforcement. The shift towards lower-quality borrowers is more pronounced with declining survey-based trust measures and negative local news coverage. In contrast, borrower quality shows little change when local news is positive or conveys the emotion of trust, and in regions with no local news outlets. Our results highlight the news media's crucial role in contextualizing news and shaping consumers' trust in banks. Additional tests reveal that our findings are inconsistent with supply-side effects.

Community Membership and Reciprocity in Lending: Evidence from Informal Markets (with Regina Wittenberg-Moerman)

Journal of Accounting and Economics, 2024, 78(1), 101697

Abstract:

We study credit access in informal economies where market institutions, such as financial reporting systems,  auditing, and courts, are nonexistent or function poorly. Using the setting of a large bazaar in India, we find that community membership plays a vital role in access to credit. Wholesalers are more likely to provide credit and offer greater amounts of credit to within-community retailers, and are more lenient when these retailers are delinquent. Furthermore, wholesalers who lent preferentially to their community retailers pre-COVID are more likely to receive help from their community following the COVID-19--related income shock, particularly from same-community landlords and suppliers. Also, wholesalers with low endowments, those with greater within-community information flow about them, and those facing income shocks are more likely to provide preferential credit to their community retailers. Our findings are consistent with an indirect reciprocity mechanism explaining within-community credit flows.

Media: 

• "Tackling the Trust Factor in Informal Sector Credit",  The Hindu BusinessLine, February 20, 2025

• Insights/Research Brief,  Becker Friedman Institute, October 21, 2021

• "In Some Places, Community Is Key to Who Gets Commercial Credit," Chicago Booth Review,  December 21, 2021

• "The Equation: The Community Ties That Count," Chicago Booth Review,  January 27, 2022
  
  

Information Preference and Credit Allocation in a Bazaar Economy (with Regina Wittenberg-Moerman)

Management Science, Forthcoming

Abstract:

Traders operating in informal economies tend to use non-accounting metrics in their credit allocation decisions. By using a combination of survey questions and a hypothetical choice experiment, we explore wholesalers' preferences for retailers' accounting information and, importantly, the reasons for its limited use. Based on estimates of wholesalers' willingness to pay for retailer information, we find that although wholesalers continue to value non-accounting information such as retailers' community membership and relationship length, they also overwhelmingly value their sales and profits in making credit decisions. However, wholesalers do not use accounting information because they perceive it to be unreliable, and retailers do not share this information because they feel it will be misused. Our findings suggest that improving the reliability of accounting information and preventing its misuse will increase the use of such information in credit allocation in informal markets.

Media: 

• "Tackling the Trust Factor in Informal Sector Credit",  The Hindu BusinessLine, February 20, 2025

• Insights/Research Brief,  Becker Friedman Institute, March 15, 2023

• "In Informal Markets, Trustworthy Data Are Key," Chicago Booth Review, September 04, 2023
  
  

Banking on Trust: Supervisory Transparency and Depositors' Actions (with Abhiman Das and Tanmoy Majilla)

Working paper

R&R at Management Science

Abstract:

We explore the role of institutional trust in influencing depositors' reactions to bank supervisory actions in India. Utilizing a unique event that led to unexpected penalties on banks and the quasi-random nature of branch locations, we find news of penalties on some banks leading to deposit withdrawals from offending and neighboring nonoffending branches. Such withdrawals are more pronounced in regions with lower trust in public institutions, including trust in courts and banks. Trust is associated with information access and the quality of local services. We find limited evidence that credit and economic activity also decline in regions with deposit withdrawals.

Media: 

• Insights/Research Brief,  Becker Friedman Institute, July 11, 2024

• "Are Big Bank Penalties Good or Bad for the Financial System?," Chicago Booth Review, October 08, 2024
  
  

Out of Site, Out of Mind? The Role of the Government-Appointed Corporate Monitor (with Lindsey Gallo and Kendall Lynch)

Journal of Accounting Research, 2023, 61(5), 1633-1698

Abstract:

We study the role of a relatively new type of external firm monitor, an on-site government-appointed Corporate Monitor, and assess whether such appointments reduce firms' propensity to violate laws. Using a sample of deferred and non-prosecution agreements, we first document the determinants of Monitor-appointment. We find firms that voluntarily disclose wrongdoing and have more independent directors are less likely to have Corporate Monitors, whereas those with more severe infractions, mandated board changes, and increased cooperation requirements are more likely to have Monitors. We find such appointments are associated with an 18%-25% reduction in violations while the Monitor is on site, however, the effect does not persist after the Monitorship ends. Using a semi-supervised machine learning method to measure changes in firms' ethics and compliance norms, we find that the reduction in violations is associated with changes in ethics and compliance that also do not persist. Finally, we document that firms under Monitorship experience a persistent reduction in innovation, highlighting a previously unexplored cost of these interventions. Overall, our results suggest that, although Corporate Monitors on site are associated with fewer violations, firms revert to previous levels of violations following Monitors' departure.

Supporting materials: 

The online appendix can be found here: Online Appendix

Awards:

• The 2022-23 Glen McLaughlin Prize for Research in Accounting Ethics (Steed School of Accounting, University of Oklahoma)

Media:  

• "A Way to Keep Errant Companies in Line—for Awhile," Chicago Booth Review,  April 07, 2021
  
  

Repatriation Taxes and Foreign Cash Holdings: The Impact of Anticipated Tax Reform (with Lisa De Simone and Joseph Piotroski)

The Review of Financial Studies, 2019, 32(8), 3105-3143

Abstract:

We examine whether an anticipated reduction in future repatriation taxes affects the amount of cash U.S. multinationals hold overseas. We find that the expected benefits of a repatriation tax reduction are positively associated with accelerated accumulations of global cash holdings once Congress proposed legislation. Additional tests examining domestic and foreign corporations, voluntary disclosures of foreign cash, and corporate payout behavior support our conclusion that observed increases in excess global cash are driven by changes in foreign cash. We also document that U.S. multinationals accumulating excess cash engage in complementary organizational and financial reporting activities designed to maximize expected tax benefits.

Media:  

• "Cutting taxes on profits earned abroad would be a pointless giveaway," The Economist, September 09, 2017

• "Why the Prospect of a Lower Tax Bill Leads US Companies to Move Profits Abroad," Chicago Booth Review,  December 01, 2017

• "The King's Dilemma," Chicago Booth Review,  Spring, 2018
  
  

Supply Chain Shocks and Firm Productivity: The Role of Accounting Information Quality (with Philip Berger)

Journal of Accounting and Economics, Conditionally accepted

Abstract:

We examine the role of accounting information quality in firms' responses to a supply chain shock. Large bodies of research examine the role of accounting quality in recurring operating or investing decisions, but evidence is lacking on how the quality of accounting information relates to how well firms restructure in the face of a disruptive shock. Our shock is the 1999 Taiwan earthquake, which negatively impacted a subset of US high-technology manufacturing firms by disrupting their supply chains. We find total factor productivity increases for affected US high-tech firms relative to unaffected ones. We also find that affected firms increase their productivity more if they have higher pre-shock accounting quality. Finally, we investigate the channels by which the accounting quality mechanism operates in our setting and find that better accounting quality reduces information frictions related to management's assessment of the investment opportunity set.

Awards:

• Best Paper in Corporate Finance, 2018 SFS Cavalcade Asia-Pacific

Media: 

• Insights/Research Brief,  Becker Friedman Institute, February 12, 2025