Scott Liao

Do Delays in Expected Loss Recognition Affect Banks' Willingness to Lend?

Banks can decrease their future capital inadequacy concerns by reducing lending. The capital crunch theory predicts that lending is particularly sensitive to regulatory capital constraints during recessions, when regulatory capital declines and external-financing frictions increase. Regulators and policy makers argue that the current loan loss provisioning rules magnify this pro-cyclicality. Exploiting variation in the delay in expected loss recognition under the current incurred loss model, we find that reductions in lending during recessionary relative to expansionary periods are lower for banks that delay less. We also find that smaller delays reduce the recessionary capital crunch effect. These results hold across management quality partitions.

The Spillover Effect of Fraudulent Financial Reporting on Peer Firms’ Investments

We investigate how high-profile accounting frauds affect peer firms’ investment. We document that peers react to the fraudulent reports by increasing investment during fraud periods. We show that this finding is not driven by frauds that have a higher ex ante likelihood of detection or by an association between fraud and investment booms. In addition, we find that peers’ investments increase in fraudulent earnings overstatements, and in industries with higher investor sentiment, lower cost of capital and higher private benefits of control. We also find evidence consistent with equity analysts potentially facilitating the spillover effect.

Product Market Peers in Lending: Information Processing Efficiencies and Proprietary Costs

This study examines how product market peers affect lending relationships. We contend that firms are more likely to borrow from a bank that has previously lent to a peer, to mitigate information asymmetry with the bank when potential information processing efficiencies are greater (i.e., information efficiency hypothesis), but there will be a decreased propensity to borrow from a shared lender when the costs of leaking proprietary information are greater (i.e., proprietary information leakage hypothesis). We find that, on average, firms avoid borrowing from banks that lend to a product market peer. We also document evidence consistent with both hypotheses in both cross-sectional and difference-in-difference research designs. In additional analysis, we examine the pricing of loans and observe loan pricing effects consistent with these two hypotheses.This study examines the effect of banks’ competitor-specific knowledge, whether a bank has lent money to a firm’s product-market competitors (i.e., rivals), on the matching of firms to lenders. We find an increased propensity of firms obtaining a loan from a bank that has also lent to firms’ rivals. We find that this relation is accentuated for firms with high levels of financial reporting opacity and attenuated for firms with high proprietary costs. These cross-sectional results are consistent with the benefits of information efficiencies being greater when borrowers’ financial reporting opacity is higher and the costs of leaking information being higher when firms have greater potential proprietary information. We also assess the economic consequences of our main findings by examining the pricing of bank loans. Consistent with lenders being able to leverage their inside knowledge of firms within the same product market and transfer the information efficiencies to borrowers, we document a reduction in the spread over LIBOR when firms borrow from banks that have previously lent to their rivals.