Observing Enforcement: Evidence from Banking (with Anya Kleymenova)
- Bureau Van Dijk Best Paper Award in Banking, 2019 SBFC
- 2020 EFA Best Paper Award
Journal of Accounting Research

This paper finds that the disclosure of supervisory actions by bank regulators is associated with changes in their enforcement behavior. Using a novel sample of enforcement decisions and orders (EDOs) and a change in the disclosure regime, we find that regulators issue more EDOs, intervene sooner, and rely more on publicly observable signals following the regime change. EDO documents become longer, more complex and contain more boilerplate language. Our results also indicate that intervention happens sooner and more frequently in counties with higher news circulation, which suggests that regulators take into account the public perception of their actions. We evaluate potentially confounding factors, including the S&L crisis and competition from thrifts, and find robust results. We also study bank outcomes and document that uninsured deposits decline at EDO banks in the disclosure regime, especially for those covered in the news. Finally, we observe that bank failure accelerates despite improvements in capital ratios and asset quality. Overall, our research provides new insights on the disclosure of regulatory actions.

The online appendix can be found here: Online Appendix


Threat of entry and the use of discretion in banks' financial reporting
Journal of Accounting and Economics, 2019, 67(1), 1-35

This paper studies managers' use of accounting discretion to deter entry. Using state-level changes in branching regulation under the Interstate Banking and Branching Efficiency Act, I find geographically-constrained community banks increased their loan loss provisions to appear less profitable when faced with the threat of entry by competitors. Additional tests rule out alternative explanations that firm economics or regulators drove the increase. I complement my analyses with survey-based evidence. Findings from the survey confirm that banks prefer to locate in markets where incumbents have high profitability and low credit losses, and that banks use competitors' financial statements to analyze competition.

As part of this study, I conducted a survey of community bankers. Details related to the survey can be found in Appendix A of the paper, as well as here: Competition in Community Banking Survey

The survey instrument can be found here: Survey Instrument

Repatriation Taxes and Foreign Cash Holdings: The Impact of Anticipated Tax Reform
(with Lisa De Simone and Joseph Piotroski)
The Review of Financial Studies, 2019, 32(8), 3105-3143

We examine whether an anticipated reduction in future repatriation taxes affects the amount of cash U.S. multinationals hold overseas. We find that the expected benefits of a repatriation tax reduction are positively associated with accelerated accumulations of global cash holdings once Congress proposed legislation. Additional tests examining domestic and foreign corporations, voluntary disclosures of foreign cash, and corporate payout behavior support our conclusion that observed increases in excess global cash are driven by changes in foreign cash. We also document that U.S. multinationals accumulating excess cash engage in complementary organizational and financial reporting activities designed to maximize expected tax benefits.

Working Papers

Out of Site, Out of Mind? The Role of the Government-Appointed Corporate Monitor (with Lindsey Gallo and Kendall Lynch)

We study the role of a relatively new type of external firm monitor, an on-site government-appointed Corporate Monitor, and assess whether such appointments reduce firms' propensity to violate laws. Using a sample of deferred and non-prosecution agreements, we first document the determinants of Monitor-appointment. We find firms that voluntarily disclose wrongdoing and have more independent directors are less likely to have Corporate Monitors, whereas those with more severe infractions, mandated board changes, and increased cooperation requirements are more likely to have Monitors. Using a control sample of firms that do not require Monitor-appointments, matched on firm- and agreement-specific characteristics, and a difference-in-differences design, we find such appointments are associated with an 18%-25% reduction in violations. However, we find little evidence the effect persists after the Monitorship ends. Overall, our results suggest that, although the presence of Corporate Monitors on-site is associated with fewer violations, Monitors are less successful in changing firms' long-term behavior. Given that Monitors impose significant costs on the firm, our findings highlight the need for greater transparency around the role of the Corporate Monitor.

Community Membership and Reciprocity in Lending: Evidence from Informal Markets (with Regina Wittenberg Moerman)

We study how wholesalers assess credit risk and extend trade credit to retailers in informal economies where market institutions, such as financial reporting systems, auditing, and courts, are nonexistent or function poorly. Using the setting of a large market in India, we find that community membership plays a strong role in the access to credit. Wholesalers are more likely to provide trade credit and to offer less restrictive credit terms to within-community retailers, and are more lenient when these retailers default. Our findings suggest that an indirect reciprocity mechanism explains within-community credit flows, as evidenced by wholesalers with low endowments, those with greater within-community information flows about them, and those facing income shocks being more likely to provide preferential lending to their community retailers. The importance of the indirect reciprocity mechanism is further supported by evidence on the help traders receive from their community members following the COVID-19–related income shock.

Social Externalities of Bank Enforcement Actions: The Case of Minority Lending (with Byeongchan An, Robert M. Bushman, and Anya Kleymenova)

Enforcement decisions and orders (EDOs) issued in the wake of bank supervisory interventions can competitively disadvantage banks in deposit and lending markets, and impose negative externalities on the economy. On the other hand, corrective actions imposed by EDOs can fundamentally improve banks’ balance sheets, risk management processes and lending practices post-EDO. In this paper, we extend the literature by exploring the extent to which corrective actions specified in EDOs generate unintended, positive social externalities in mortgage lending markets. Specifically, we focus on changes in banks’ borrower base and investigate whether banks increase their mortgage lending to minority borrowers following the resolution of severe EDOs, even when the EDO is unrelated to fair lending laws. We find that mortgage lending to minority borrowers significantly increases post-EDO, where this positive effect on minority lending increases with the severity of the EDO. We also provide evidence consistent with this increase being driven by corrective actions that result in less reliance on non-price terms in the loan approval process for minority borrowers, improved loan policies and stronger governance over lending decisions. The effect of these corrective actions is significantly stronger in markets with a greater proportion of subprime borrowers. We find no evidence that this increase in minority lending derives from regulatory capital concerns or EDO-related competitive disadvantage, or that it is associated with riskier loans or lower loan quality.