Aytekin Ertan

Enhancing Loan Quality Through Transparency: Evidence from the European Central Bank Loan Level Reporting Initiative

We explore whether transparency in banks’ securitization activities enhances loan quality. We take advantage of a novel disclosure initiative introduced by the European Central Bank, which requires, as of January 2013, banks that use their asset-backed securities as collateral for repo financing to report securitized loan characteristics and performance in a standardized format. We find that securitized loans originated under the transparency regime are of better quality with a lower default probability, a lower delinquent amount, fewer days in delinquency and lower losses upon default. Additionally, banks with more intensive loan level information collection and those operating under stronger market discipline experience greater improvement in their loan quality under the new reporting standards. Overall, we demonstrate that greater transparency has real effects by incentivizing banks to improve their credit practices.

Individual Investor Overextrapolation

Individual investors are more likely to purchase stock immediately before earnings announcements for stocks with a recent history of high earnings announcement returns. Consistent with extrapolative pre-announcement purchases pushing up prices, we find evidence that firms with recent high earnings announcement returns see predictable increases in prices before earnings announcements and predictable decreases afterwards. These return patterns are economically significant: investors that buy (sell) a portfolio that is long firms with high recent earnings announcement returns and short firms with low recent earnings announcement returns in the pre-announcement (post-announcement) period earns a five factor daily alpha of 16.1 bps (18.3 bps). Finally, we link extrapolation to a variety of return patterns around earnings announcements and show that extrapolation offers a partial explanation for the pre-earnings-announcement premium.

Financial Intermediation Through Financial Disintermediation: Evidence from the ECB Corporate Sector Purchase Programme

We study the spillover effects of financial disintermediation on the supply of credit to small and medium enterprises (SMEs). We find that direct central bank lending to large corporations induces banks to increase lending to SMEs by 8 to 12 percent. This effect is stronger for liquidity-constrained banks. SMEs with relationship banks affected by disintermediation borrow approximately €77,750 more relative to SMEs in the same country and industry. SMEs use these funds to invest in real activities and increase employment. We verify that our inferences are not due to changing economic fundamentals, demand from SMEs, or selection in central bank financing. Despite documenting positive effects, we also find that they disappear once new liquidity injections stop and the policy reaches a steady state. Our findings provide some insights on the ability of this macroeconomic policy tool to increase employment during the ongoing COVID-19 pandemic through financial disintermediation serving as an additional channel to provide access to financing for SMEs.

Does Financial Reporting Matter? Evidence from Accounting Standards

By allowing investors to efficiently allocate capital, developed financial markets promote economic growth. We revisit a key component of financial market development, namely financial reporting standards, to identify a channel underpinning this link. We focus on introductions of new financial reporting standards and construct a novel text-based, firm-level measure of sensitivity to these standards. Relative to insensitive firms, sensitive firms reduce securities issuance by 11.4% and, despite compensating with internal sources of funds, cut investment by 10.8% after standards. These findings demonstrate that new standards trigger a substantial reallocation of capital through financial markets.We exploit firms’ voluntary disclosures as a novel firm-specific measure of ex ante sensitivity to individual FASB accounting standards to study the real effects of information regulation. We find that accounting standards impact capital allocation by increasing the cost and reducing the supply of credit and equity financing for sensitive firms. Affected firms respond by drawing down cash reserves and selling more assets compared to insensitive firms. Facing these financial constraints, affected firms cut payout by 2.6% and investment by 3.6%, on average. Our results suggest that accounting standards have economically significant real effects because they reallocate capital in financial markets. JEL Classification: G21, G28, G32, M41

Mandatory Bank Disclosures and Credit Access

We employ the European Central Bank’s Loan-level Reporting Initiative as a shock to banks’ asset disclosures. We find that, after the regulation, treatment banks raise more capital at cheaper rates and increase lending. Using novel survey data on small businesses, we also document that, in regimes with heightened bank disclosures, borrowers receive greater funding, conditional on their demand for credit. Furthermore, companies whose relationship banks provide asset disclosures start to borrow and invest more, relative to other firms from the same country and industry. Collectively, our inferences suggest that asset disclosures alleviate the capital market frictions that banks face and allow them to supply more credit to the real economy.

Debt Financing and Collateral: The Role of Fair-Value Adjustments

Using a novel dataset of business combination disclosures, we investigate whether fair-value adjustments (FVAs) of a target’s assets provide relevant information to lenders that allows the postdeal entity to enhance its borrowing activities. FVAs reflect the difference between the target’s book value of net assets and the fair value of these assets at acquisition date. We find that the average corporate acquirer reports FVAs on assets other than goodwill that reflect an economically significant increase of 60 percent in the value of the target’s total assets. We document that FVAs are associated with substantial new debt issuance by the combined firm during the three-year period after the acquisition. FVAs are also associated with the issuance of cheaper and longer term debt as well as debt that is secured and more likely to have balance sheet covenants. Consistent with these findings, we show that bond yields decrease during the period around the publication of FVAs. All results are driven by FVAs reported on the target’s tangible assets, the main set of collateralizable assets. This evidence indicates that fair value measurements around business combinations provide a certification role for the value of a target’s assets, improving lenders understanding of the collateralizable asset base. JEL Classifications: M41, G32, G34, G12Using a novel hand-collected dataset of business combination disclosures, we investigate whether fair-value adjustments (FVAs) of a target’s assets allow the acquiring firm to enhance its borrowing activities. FVAs are the difference between the fair value of the target’s net assets and their book value at the acquisition date. We find that the average corporate acquirer reports economically significant FVAs on assets other than goodwill, reflecting an increase of 60 percent in the value of the target’s total assets. We document that FVAs are associated with substantial new debt issuance by the acquiring firm during the three-year period after the transaction. FVAs are also associated with the issuance of cheaper, secured, and longer-term debt, which is also more likely to have balance sheet covenants. Our findings are driven by FVAs reported on the target’s tangible assets, which indicates that the shift from historical cost to fair value measurement around business combinations provides new information about the firm’s collateralizable asset base that is relevant to lenders.

Short-Termism Spillovers from the Financial Industry

To meet short-term benchmarks, lenders may alter their monitoring behavior, providing a channel for short-termism incentives to spillover into the corporate sector. We find that lenders with short-termism incentives enforce material covenant violations at abnormally high rates. Further, they are more likely to target high-quality borrowers with which they have a prior relationship and that are less financially constrained. Affected borrowers are more likely to switch lenders, receive worse loan terms on future loans, and reduce investment. Market reactions to technical default announcements when lenders have short-term incentives are 0.63% lower, suggesting that short-termism spillovers are value-decreasing.

Credit Information Sharing, Loan Loss Recognition Timeliness, and Financial Stability

Does enhancing banks’ information sets and understanding of credit risks improve loan loss recognition? We study this question using a global dataset of staggered initiations and coverage increases of public credit registries (PCRs). Mandated by national regulators, PCRs collect borrower and loan information from lenders and share it with the banks in the financial system. This setting represents a significant improvement in banks’ assessment of loss events. We find that PCR initiations and coverage reforms enhance the timeliness of banks’ loan loss recognition—the extent to which loan loss provisions capture subsequent nonperforming loans. The effects are greater when PCRs distribute more information and are not driven by changes in borrower quality or supervisory stringency. Overall, these inferences are consistent with improvements in banks’ information sets leading to better provisioning decisions.

Credit Supply and Contracting on Hard Information in Debt Markets

We use fair value adoption as a quasi-natural experiment to analyze the real effects of hard information used in loan screening and contracting. After fair value adoption, the use of contingent contract terms depending on fair value accounting information significantly declined. Capital-based covenant usage by treated borrowers dropped by 7.7 percentage points relative to control borrowers. Treated borrowers also experienced 8.2% and 2.8% relative drops in borrowing and real activities, respectively, implying that they could not compensate with alternative financing sources. Our evidence suggests that properties of hard information drive debt contracting, particularly through screening, managerial discretion, and risk-shifting incentives.