The Politics of Implementing Bank Reporting Regulation: Evidence from China

54 Pages Posted: 16 May 2022 Last revised: 30 Jul 2023

See all articles by Mingyi Hung

Mingyi Hung

Hong Kong University of Science & Technology (HKUST)

Yi Ru

Renmin University of China - Business School

Guoman She

The University of Hong Kong - Faculty of Business and Economics

Lynn Linghuan Wang

The University of Hong Kong - Faculty of Business and Economics

Date Written: July 27, 2023

Abstract

We investigate whether state-owned banks respond to the adoption of a forward-looking provisioning model and whether their responses are affected by politicians’ career incentives. Using the mandatory shift to the expected credit loss model in China, we find that the increases in the magnitudes and timeliness of loan loss provisions following the mandatory shift are smaller for state-owned banks with local governors in late term of their appointment, referred to as banks with high-incentive governors. Additional analysis suggests that connections with asset management companies facilitate underreporting of provisions. Further, relative to other treatment banks, banks with high-incentive governors prior to the COVID recession experience greater lending reductions and face more fraud charges during the recession. Overall, our findings suggest that politicians’ career incentives lead to opportunistic underreporting of provisions and dampen the effectiveness of financial reporting regulation in reducing lending procyclicality.

Keywords: Bank financial reporting; IFRS 9; Loan loss provision; State-owned banks

Suggested Citation

Hung, Mingyi and Ru, Yi and She, Guoman and Wang, Lynn Linghuan, The Politics of Implementing Bank Reporting Regulation: Evidence from China (July 27, 2023). Available at SSRN: https://ssrn.com/abstract=4098566 or http://dx.doi.org/10.2139/ssrn.4098566

Mingyi Hung

Hong Kong University of Science & Technology (HKUST) ( email )

Clearwater Bay
Kowloon, 999999
Hong Kong

Yi Ru

Renmin University of China - Business School ( email )

Room 929
Mingde Business Building
Beijing, Beijing 100872
China

Guoman She (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Lynn Linghuan Wang

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
Hong Kong

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