Rimmy E. Tomy

Associate Professor of Accounting

The University of Chicago Booth School of Business

Regulation and enforcement in the financial sector

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:

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:

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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

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Financial sector enforcement and credit access in developing markets

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

Journal of Accounting and Economics, Forthcoming

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.

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

Working paper

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.

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Banking on Trust: Supervisory Transparency in Developing Economies (with Abhiman Das and Tanmoy Majilla)

Working paper

Abstract:

We explore the role of trust in public institutions in influencing depositors' reactions to the disclosure of bank supervisory actions in a developing economy. Utilizing branch-level data on the deposits of commercial banks in India, we find that news of supervisory penalties on some banks leads depositors to withdraw funds from offending and neighboring nonoffending branches. Relative to regions with higher trust in public institutions, such withdrawals are more pronounced in regions with lower trust, including trust in the local governments, courts, and banks. We explore the determinants of such trust and find it strongly associated with information access and the quality of local services. Credit access and economic activity also decline in regions that witness deposit withdrawals. Our findings could inform regulators' decisions to disclose the outcome of their supervisory efforts in developing markets with weak enforcement and low trust in public institutions.

Regulation and enforcement in the broader economy

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:

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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.

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Accounting information and productivity

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

Working paper

Abstract:

We examine the role of accounting information quality in firms' responses to a competitive 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 competitive shock. Our shock is the 1999 Taiwan earthquake, which increases product market competition for a subset of US high-technology manufacturing firms that have their supply inputs adversely affected. Consistent with prior work on responses to competitive shocks, we find total factor productivity increases for affected US high-tech firms relative to unaffected ones. We also find, however that affected firms with higher pre-shock accounting quality increase their productivity more than affected firms with lower 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 moral hazard or to management's assessment of the investment opportunity set.