Organizational Memory and Bank Accounting Conservatism

Abstract

This paper is the first to investigate the impact of banks’ organizational memory of past history on the conservatism of accounting policy. Specifically, we investigate two types of bad time history: banks’ undercapitalization and the failures of other banks during financial crises. Using a large sample of U.S. banks over the period 1997-2013, we find that both types of bad times are positively related to timelier recognition of earnings decreases versus earnings increases in accounting income. We also find that following bad times, banks increase their allowance for loan losses. The results of path analysis and survey research indicate that bad time memory of banks impacts bank accounting conservatism through CEO tenure and board of directors’ tenure. Collectively, our results suggest that banks’ organizational memory of bad times and macro-level banking crises lead to greater accounting conservatism in banks.

Keywords: Organizational Memory; Bank Accounting Conservatism; Bank History; Allowance for Loan Losses