Research
Work in Progress:
(with Silvina Rubio) R&R in Journal of Money, Credit and Banking
We investigate whether bank capital regulations can create incentives for banks to hold capital above minimum requirements. We exploit the Federal Deposit Insurance Corporation Improvement Act of 1991, which introduced a 10\% capitalization threshold to separate \textit{well-capitalized} from \textit{adequately capitalized} banks, with the former receiving regulatory incentives. We document a statistically significant discontinuity around the 10\% threshold, suggesting that these incentives matter for banks. We find that banks manage regulatory capital to exceed this threshold and thus pay lower deposit insurance fees and to access brokered deposits and financial activities. To reach this threshold, banks often rely on equity sales and transfers from parent institutions, while accounting discretion is used mostly when the capital shortfall is relatively small. This finding suggests that regulations that offer incentives can be effective at increasing banks' capital position. We find some evidence that capital management hurts bank stability but only when banks use their accounting discretion to exceed the threshold.
Voluntary Audit in Small Private Banks
(with Beatriz García Osma and Ines Simac)
This paper examines small private banks' voluntary audit choice, their accounting quality, and economic consequences. We find that an important determinant to voluntarily audit their accounts is high supervisory scrutiny. The voluntary audit is associated with more conservative loan loss provisioning and a lower likelihood of future restatements, but audited banks are more likely to manage with real accounting tools. Economic consequences include safer lending practices, higher loan growth, and more brokered deposits.
Earnings management around CRA examinations
(with Beatriz García Osma and Silvina Rubio)
The Community Reinvestment Act (CRA) encourages U.S. banks to meet the credit needs of the communities in which they operate. The federal banking agencies perform periodical inspections to ensure banks meet the credit needs of the local communities in which they operate, particularly low and moderate-income areas. We document significant income-decreasing loan loss provisions before CRA exams and a reversal after the exams, consistent with banks managing accruals to mitigate the political costs of CRA regulation. Banks with low regulatory capital or public banks do not exhibit this type of earnings management, consistent with the idea that banks trade-off capital market and regulatory capital considerations.
Auditors and client investment efficiency: A quasi-replication and an extension to private audit clients
(with Christopher Bleibtreu, Mert Erinc, and Zhenyang Shi) R&R Journal of Business and Economics
This study is a replication and extension of Bae et al. (2017), which examines the relationship between auditors’ characteristics and their audit clients’ investment efficiency. Whereas Bae et al. (2017) use U.S. public firm data, we draw a more general picture by using both public and private firm data from Norway. Overall, the results for Norwegian public and private firms are in line with those Bae et al. (2017) find for public U.S. firms. That is, audit clients invest more efficiently if their auditors have more knowledge and resources, measured by auditor market shares or whether a Big N audit firm conducts the audit. Further, an auditor’s influence on its client’s investment efficiency is more pronounced when clients have a higher demand for information, proxied by client firm size and client complexity. Finally, exploiting a regulatory change in 2011 that allowed small private Norwegian firms opting out of the previously mandatory audit, we add that audits can increase investment efficiency even for very small private firms.
Earnings Management, Collateral Constraints, and Business Cycle Fluctuations
(with Kizkitza Biguri)
We provide the micro-foundations for a macro-finance-accounting model in which firms' earnings management (EM) actions facilitate an additional amplification and persistence mechanism for exogenous shocks to the real economy. We build evidence to support that EM is strongly procyclical and mainly driven by the behavior of financially constrained firms. We also find that the positive effect of EM is stronger for secured debt issues, which emphasizes the role of collateral in the transmission, propagation, and amplification of shocks. The latter supports the role of financially constrained firms in driving most of the cyclical variations in employment, investment, and output. Overall, our results deepen our understanding of the potential effects of interactions between the macroeconomy and firms' behavior on research in accounting and finance.
The effect of common ownership on accounting quality
(with Facundo Mercado and Silvina Rubio)
In this paper, we study whether industry's firms that are more commonly owned by the same set of institutional investors have better financial reporting quality. We argue that asset management companies that have control over an industry have higher incentives to monitor managers, leading to an increase in financial reporting quality. We find that there is a positive association between common ownership and several measures of financial reporting quality, such as comparability, discretionary accruals, and real earnings management. This association is not captured by institutional ownership, product market competition, or other known determinants of financial reporting quality.