Research
Working papers
Processing Forward-Looking Loan Loss Provisions: Evidence from the Adoption of the CECL model
Job Market Paper
This paper examines the impact of the adoption of the Current Expected Credit Loss (CECL) model on the ability of equity investors to understand the valuation implications of loan loss provisions. Specifically, we examine the efficiency with which investors process the information conveyed at earnings announcements, as measured by the speed of resolution of investor disagreement and uncertainty. Using a difference-in-differences methodology, we find that the CECL model is associated with a slower speed of resolution of investor disagreement and uncertainty during earnings announcements. This finding suggests that the greater managerial discretion and uncertainty in estimating loan loss provisions under the CECL model adds complexity to the valuation of earnings. The effect is more pronounced for loan loss provisions at loan origination and when banks do not disclose the assumptions used to estimate expected credit losses. Our results suggest the importance of improving disclosures about the CECL model to enhance the comparability and verifiability of loan loss provisions across banks and over time.
How do changes in financial reporting standards affect relationship lending?
Joint with Wayne Landsman, Sergio Mayordomo and Irene Roibás
This paper studies the effect of the expected credit loss model under IFRS 9 on relationship lending in Spain. We document that the relationship exclusivity between a bank and a firm has a positive effect on the growth of credit. However, such positive effect is significantly reduced after IFRS 9. Considering borrowers in Stage 1, we show that the negative impact of the new regulation on relationship lending is present for firms with a higher probability of default and whose credit quality has deteriorated. Our findings are consistent with a change in the incentives that underpin relationship lending. After IFRS 9, banks holding a more exclusive relationship with a firm are less willing to further increase their exposure if this may imply large expected credit losses at loan origination and a high probability that the borrower downgrades to Stage 2 in future periods.