Shifting from the Incurred to the Expected Credit Loss Model and Stock Price Crash Risk

Posted: 4 Mar 2023

See all articles by Qinglu Jin

Qinglu Jin

Shanghai University of Finance and Economics

Sirui Wu

Xi'an Jiaotong University (XJTU); Shanghai University of Finance and Economics - School of Accountancy

Date Written: 2023

Abstract

Using a difference-in-differences (DID) design, this study examines the effect of shifting from the incurred credit loss model (ICL model) to the expected credit loss model (ECL model) on banks’ future stock price crash risk. We find that switching to the ECL model decreases the stock price crash risk of commercial banks. Inspired by Onali et al. (2021), we proceed with cross-sectional tests from the perspectives of opportunistic incentives, information environments, and compliance costs and find that the effect is more pronounced for (i) banks with less opportunistic incentives, proxied by state-owned property rights and managerial ownership; (ii) banks with opaque internal and external information environments, proxied by weak internal control, weak board governance, low analyst coverage, and short auditor tenure; and (iii) banks with lower implementation costs, proxied by less day-one impact and higher levels of accounting conservatism. Channel analyses show that banks increase their asset impairment provisions and the timeliness of loan loss recognition, and there is an increase in the value relevance of earnings and bank efficiency after the adoption of the ECL model. Overall, our evidence suggests that the flexibility of principle-based accounting standards influences banks’ stock price crash risk and provides implications that could be helpful to regulators and standard setters.

Keywords: IFRS 9, ECL model, Stock price crash risk

JEL Classification: M41, J88

Suggested Citation

Jin, Qinglu and Wu, Sirui, Shifting from the Incurred to the Expected Credit Loss Model and Stock Price Crash Risk ( 2023). Journal of Accounting and Public Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4371230

Qinglu Jin

Shanghai University of Finance and Economics ( email )

777 Guoding Road
Shanghai, AK Shanghai 200433
China
86-21-65908982 (Phone)

Sirui Wu (Contact Author)

Xi'an Jiaotong University (XJTU) ( email )

26 Xianning W Rd.
Xi'an Jiao Tong University
Xi'an, Shaanxi 710049
China

Shanghai University of Finance and Economics - School of Accountancy ( email )

No. 777 Guoding Road, Shanghai
Shanghai, 200433
China

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