Research

[12] Response to the Financial Accounting Standards Board’s “Proposed Accounting Standards Update — Government Grants (Topic 832): Accounting for Government Grants by Business Entities” 

This paper summarizes a comment letter we submitted to the Financial Accounting Standards Board in March 2025 in response to its proposed amendments to accounting for government grants by business entities. We submitted a comment letter at the request of the Financial Reporting Policy Committee, which is charged by the Financial Accounting and Reporting Section of the American Accounting Association with responding to requests for comment from standard setters on financial reporting issues. The proposed amendments aim to establish authoritative guidance on accounting for government grants received by business entities. We conclude that the proposed amendments will not provide decision-useful information to financial statement users. We detail the concerns underlying this conclusion and offer recommendations to address them. We also summarize findings from academic research and offer suggestions for future research. 

[11] “Regulatory Leniency and the Cost of Deposits” 

We examine whether variation in regulatory leniency is associated with the cost of deposits in the banking industry. We predict that lenient regulatory supervision allows for greater bank risk-taking due to delayed intervention, resulting in a higher cost of deposits. Our main finding is a positive association between banks’ cost of uninsured deposits and the leniency of their state regulators, incremental to observable measures of risk and performance. We further show that this result is stronger for riskier banks and when uninsured depositors have a greater ability or incentive to influence deposit rates. These findings suggest that the leniency of bank regulators is priced in uninsured deposit rates and further our understanding of the factors associated with regulatory leniency in the banking industry. 

[10] “Financial Accounting Disclosure in Banking” 

The rules governing financial accounting and disclosure in the banking industry often change in response to economic crises. This chapter reviews the recent literature in four areas of research that have been directly affected by both the recent string of bank failures in the United States and the Global Financial Crisis. These areas are fair value accounting, loan loss provisioning, accounting quality and monitoring mechanisms, and stress test disclosures. These rule changes in response to crises often also serve as natural experiments where researchers use difference-in-differences analyses to identify the effect of rule changes. Because of the importance of the policy implications of these studies, we also discuss recent developments in econometrics relating to this research design. Throughout the chapter we offer potentially fruitful avenues for future research related to each of these areas. 

[9] “The Relative Importance of Information Events: An Ex Ante Perspective”

We build on recent advances in options pricing research to propose a novel measure of the ex ante relative importance of information events. Our firm-level measure captures the extent to which investors view an event as important, independent of its realized outcome. We first validate the measure and then demonstrate how it can be used to (1) study heterogeneity across firms in the relative importance of information events; (2) identify firms for which an event was important, even though the realized outcome did not result in a meaningful stock reaction; and (3) examine questions about how the importance of an event impacts firm decisions, where using realized return-based measures of event importance would result in an endogeneity problem. 

[8] “Protecting Wall Street or Main Street: SEC Monitoring and Enforcement of Retail Owned Firms” 

This study examines whether retail ownership of a firm is associated with the likelihood that the firm is subject to monitoring and enforcement by the two largest divisions of the SEC. Monitoring is a form of ex ante or preventative regulatory oversight, while enforcement is a form of ex post or punitive oversight. We find a negative association between retail ownership and SEC monitoring. In contrast, we find a positive association between retail ownership and SEC enforcement. These results suggest that the SEC is less likely to monitor firms with high retail ownership, potentially leaving current retail investors more vulnerable to unresolved financial reporting issues. Additionally, the SEC is more likely to issue enforcement actions against firms with high retail ownership, imposing costs on current retail investors when the firm is accused of egregious cases of perceived financial misreporting. 

[7] “Regulatory Treatment of Changes in Fair Value and the Composition of Banks’ Investment Portfolios” 

Following the financial crisis of 2007–2008, Basel III recommended that bank regulators include changes in the fair value of available-for-sale (AFS) debt securities in Tier 1 capital. However, the U.S. allowed smaller banks to continue excluding these changes through a one-time opt out election. This paper examines the investment decisions of smaller banks in the 1990s when changes in the fair value of AFS debt securities were temporarily included in regulatory capital. Using a sample of smaller banks and a difference-in-differences research design, we find that low-capitalized banks reduced their investments in more volatile asset classes (e.g., corporate bonds, non-agency MBS) and increased their investments in less volatile asset classes (e.g., treasuries and municipal bonds) after these changes were included. These findings suggest that providing smaller banks with an opt out election potentially allows low-capitalized, riskier banks to continue to hold more volatile securities in their AFS portfolios. 

[6] “Accounting-Based Thresholds and Growth Decisions in the Banking Industry”

This paper examines the effects of accounting-based thresholds in regulation on growth decisions in the banking industry. To investigate this relation we study changes in growth around the $10 billion asset threshold specified in the Dodd-Frank Act. We first document that, in the years after the new threshold-based regulations are announced, banks slow their asset growth as they approach the threshold and then accelerate their asset growth as they cross the threshold. Next, we document the primary mechanism banks use to achieve each of these changes in growth: reduced deposit growth rates to slow growth and increased acquisition activity to accelerate growth. Finally, we document that, while banks attempt to remain below the threshold, they reduce the growth of their investment portfolio and report a lower return on assets. Also, when banks accelerate growth through acquisition activity, those acquisitions involve larger and riskier target banks. These findings suggest that regulations with accounting-based thresholds can affect growth decisions and profitability in the banking industry.

[5] “Consistency As A Means to Comparability: Theory and Evidence” 

This paper studies Önancial statement consistencyñthe purported means to comparabilityñ from an information perspective. We model consistency as Örmsírequired propensity to apply common accounting methods to individual transactions, and show that consistency creates information spillover through correlated measurements (ìspillover channelî) while potentially reducing the informativeness of oneís own report (ìstandalone channelî). The model generates two central predictions. First, optimal consistency decreases with a transactionís fundamental correlation as high correlation diminishes information gains via the spillover channel. Second, optimal consistency decreases with a transactionís fundamental volatility as high volatility exacerbates information losses via the standalone channel. Empirical evidence supports both predictions. Overall, this paper contributes a framework for studying comparability and draws useful policy implications.

[4] “Common Mutual Fund Ownership and Systemic Risk” 

We examine whether bank connections via common mutual fund ownership serve as a contagion channel affecting the systemic risk of the banking system. Examining this relation is important because common mutual fund ownership has increased dramatically over the past 20 years, and a buildup of systemic risk was at the heart of the 2008–2009 financial crisis. We predict and document that the extent of a bank's connection with other banks via common ownership increases its contribution to systemic risk. We further predict and find that this association is primarily driven by passive mutual funds. We provide evidence that common passive ownership results in higher systemic risk through two mechanisms: nondiscretionary sell-offs of bank stocks and a common pattern of voting. Our results are also robust to two alternate instrumental variable analyses. This study contributes to the literature by documenting an unintended, macro-level consequence of common mutual fund ownership. Our findings broaden the understanding of common ownership as one mechanism through which systemic risk materializes and should be particularly relevant for regulators who seek to prevent future systemic failures. 

[3] “Seemingly Inconsistent Analyst Revisions” 

This paper examines whether public bank managers change both the composition and classification of their investment portfolios after SFAS 157. We first show that non-agency mortgage-backed securities (MBSNA) are the asset class most likely to be measured using level 3 inputs, which are based on unobservable information. We then find that relative to a control sample of private banks, public banks altered their investment portfolios in a manner that reduced the percentage of MBSNA holdings for which SFAS 157 disclosures are required. Taken together, this evidence is consistent with public banks attempting to avoid disclosure of level 3 assets through changes in both asset composition and classification.

[2] “Estimating the Potential Impact of Requiring a Stand-Alone Board-Level Risk Committee” 

Motivated by the requirement under the Dodd-Frank Act that all large bank holding companies create a stand-alone, board-level risk committee, this paper investigates the association between such a committee and regulatory risk both before and during the financial crisis. I focus the analysis on the set of banks that did not have a risk committee in place prior to the Dodd-Frank Act, as these are the banks that were most affected by the regulation. I find that matched control banks with a risk committee in place had higher capital ratios during the financial crisis, but lower capital ratios during more stable economic conditions relative to the banks without a risk committee. This paper contributes to the literature by narrowly investigating the effects a boardlevel risk committee, by focusing on a risk measure that is of interest to the regulators who implemented the new regulation, and by documenting that this association changes over time which highlights the importance of estimating the effects of new regulations across different economic conditions.

[1] “The Effects of SFAS 157 Disclosures on Investment Decisions” 

This paper examines whether public bank managers change both the composition and classification of their investment portfolios after SFAS 157. We first show that non-agency mortgage-backed securities (MBSNA) are the asset class most likely to be measured using level 3 inputs, which are based on unobservable information. We then find that relative to a control sample of private banks, public banks altered their investment portfolios in a manner that reduced the percentage of MBSNA holdings for which SFAS 157 disclosures are required. Taken together, this evidence is consistent with public banks attempting to avoid disclosure of level 3 assets through changes in both asset composition and classification.

“Does Capital Market Scrutiny Discourage Banks from Working with Distressed Borrowers?” 

To encourage banks to accommodate distressed borrowers during the Covid-19 pandemic, regulators redacted loan modification activity from each bank's public regulatory filings so that banks could modify loans free from capital market scrutiny. This study examines whether capital market scrutiny does in fact discourage banks from making loan modifications, as posited by bank regulators. We assess the effect of capital market scrutiny primarily by comparing publicly traded banks to private banks. We find no evidence of significant differences in loan modification activity between public and private banks in a long sample period prior to the pandemic nor in a shorter sample period during the pandemic. Overall, the results do not support the idea that suppressing information about loan modifications encourages additional modification activity. 

“Is Investing in Accounting an Efficient Decision?” 

This study explores the relation between the size of a firm’s accounting department and the quality of its investment decisions. To investigate this, we track the yearly employment levels of accountants within firms and find a positive association with investment efficiency. We document this association for both financial accountants and managerial accountants. However, once we control for external financial reporting quality, only the relation with managerial accountants remains significant. Cross-sectional results strengthen our conclusion that managerial accountants are associated with improved investment efficiency through reduced internal information frictions. To strengthen our inferences, we examine a negative shock to the supply of accountants and find consistent results in a difference-in-differences analysis. Our study contributes to both the investment efficiency literature and the growing body of literature emphasizing the importance of human capital by highlighting one benefit of accounting-based human capital. 

“Investment Securities Classifications: Managing Liquidity but Masking Intent”