Publications:
Work in Progress:
(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 Silvina Rubio)
We study the Community Reinvestment Act (CRA), which encourages U.S. banks to meet the credit needs of their communities, particularly in low- and moderate-income areas. Federal banking agencies conduct periodic inspections to ensure compliance. 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. This behavior is more pronounced in banks underperforming in key indicators such as earnings or loan-to-deposit ratios and those operating in CRA-eligible areas or regions with high minority populations. Conversely, banks with low regulatory capital or publicly traded banks do not exhibit this earnings management, indicating a trade-off between capital market pressures and regulatory considerations.
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.