Posts Tagged ‘Robert Bushman’

Perceived Bank Competition

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday March 20, 2013 at 9:09 am
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Editor’s Note: The following post comes to us from Robert Bushman, Professor of Accounting at the University of North Carolina at Chapel Hill; and Bradley Hendricks and Christopher Williams, both of the Department of Accounting at the University of Michigan.

How competition affects firm performance is a central question of economics. As in other sectors, competitive pressure in the banking sector can influence the efficiency of bank operations, the quality of financial products, and the extent of innovation. However, unique to the financial sector is the potential link between competition and financial stability. Does bank competition promote financial stability or undermine it by creating incentives for excessive risk-taking? Further, assessing the influence of bank competition on risk-taking behavior is of critical importance to financial analysts, credit rating agencies and investors who seek to forecast banks’ future prospects. This task is perhaps more difficult in banking relative to other industries, given the wide-spread perception that banks are unusually opaque.

In our paper, Perceived Bank Competition: Operational Decision-Making and Bank Stability, which was recently made publicly available on SSRN, we utilize a bank-specific measure that extracts a bank’s perception of its competitive environment from a textual analysis of its 10-K filing. The premise is that managers’ perceptions of the competitive environment influence their operating and risk-taking decisions. We show that this measure is related to future operating performance and bank decision-making in ways that suggest it captures real competitive forces exerting pressure on banks.

…continue reading: Perceived Bank Competition

Accounting Discretion, Loan Loss Provisioning and Discipline of Banks’ Risk-Taking

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday June 11, 2012 at 9:28 am
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Editor’s Note: The following post comes from Robert Bushman, Professor of Accounting at the University of North Carolina at Chapel Hill, and Christopher Williams of the Department of Accounting at the University of Michigan.

In our paper, Accounting Discretion, Loan Loss Provisioning and Discipline of Banks’ Risk-Taking, forthcoming in the Journal of Accounting and Economics, we empirically delineate economic consequences associated with differences in accounting discretion permitted to banks under existing regulatory regimes. Policy makers argue that loan loss accounting should allow bank managers’ more discretion to incorporate forward-looking judgments into loan loss provisions. This paper explores potential consequences of such increased discretion for the role of accounting information in supporting outside discipline of bank risk-taking.

Using a large sample of banks from 27 countries, we estimate two distinct constructs of the extent to which discretionary loan provisioning practices within a country reflect a forward-looking orientation. We investigate whether each aspect is associated with stronger or weaker discipline of bank risk-taking. We model risk-taking discipline using two measures: (1) the sensitivity of changes in bank capital to changes in bank risk; and (2) the observed risk-shifting behavior of banks. We find that discretionary provisioning in the form of earnings smoothing dampens disciplinary pressure on risk-taking, consistent with smoothing reducing bank transparency and inhibiting monitoring by outsiders. In contrast, discretionary provisioning practices that increase the extent to which current loan provisions explicitly anticipate future loan portfolio deterioration are associated with enhanced discipline of bank risk-taking.

…continue reading: Accounting Discretion, Loan Loss Provisioning and Discipline of Banks’ Risk-Taking

 
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