Do Firms Adjust Their Timely Loss Recognition in Response to Changes in the Banking Industry?

59 Pages Posted: 10 Sep 2008 Last revised: 17 Jun 2014

See all articles by Todd A. Gormley

Todd A. Gormley

Washington University in St. Louis

Bong Hwan Kim

Seoul National University

Xiumin Martin

Washington University in Saint Louis - Olin School of Business

Date Written: July 13, 2011

Abstract

This paper investigates the impact of changes in the banking sector on firms’ timely recognition of economic losses. In particular, we focus on the entry of foreign banks into India during the 1990s, which likely causes an exogenous increase in lender demand for timely loss recognition. Analyzing variation in both the timing and the location of the new foreign banks’ entries, we find that foreign bank entry is associated with more timely loss recognition and this increase is positively related to a firm’s subsequent debt levels. The change appears driven by a shift in firms’ incentives to supply additional information to lenders and lenders seem to value this information. The increase in timely loss recognition is also concentrated among firms more dependent on external financing: private firms, smaller firms, and non-group firms. Overall, our evidence suggests that a firm’s accounting choices respond to changes in the banking industry.

Keywords: Bank Entry, Information, Timely Loss Recognition, India

JEL Classification: D82, G21, O16, M41

Suggested Citation

Gormley, Todd A. and Kim, Bong Hwan and Martin, Xiumin, Do Firms Adjust Their Timely Loss Recognition in Response to Changes in the Banking Industry? (July 13, 2011). Journal of Accounting Research, 2012, 50(1), pp. 159-196.; AFA 2010 Atlanta Meetings Paper. Available at SSRN: https://ssrn.com/abstract=1265109

Todd A. Gormley

Washington University in St. Louis ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
(314) 935-7171 (Phone)

HOME PAGE: http://www.gormley.info

Bong Hwan Kim (Contact Author)

Seoul National University ( email )

1 Gwanak-ro, Gwanak-gu
Seoul, 151-742
Korea, Republic of (South Korea)

Xiumin Martin

Washington University in Saint Louis - Olin School of Business ( email )

Saint Louis, MO 63130
United States

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