ABSTRACT We investigate how provisioning models interact with bank regulation to affect banks' risk‐taking behavior. We study an accuracy versus timeliness trade‐off between an incurred loss model (IL) and an expected loss model (EL) such as current expected credit loss model or International Financial Reporting Standards 9. Relative to IL, even though EL improves efficiency by prompting earlier corrective action in bad times, it induces banks to originate either safer or riskier loans. Trading off ex post benefits versus ex ante real effects, we show that more timely information under EL enhances efficiency either when banks are insufficiently capitalized or when regulatory intervention is likely to be effective. Conversely, when banks are moderately capitalized and regulatory intervention is sufficiently costly, switching to EL impairs efficiency. From a policy perspective, our analysis highlights the roles that regulatory capital and the effectiveness of regulatory intervention play in determining the economic consequences of provisioning models. EL spurs credit supply and improves financial stability in economies where intervening in banks' operations is relatively frictionless and/or regulators can tailor regulatory capital to incorporate information about credit losses.

ABSTRACT We show how shareholder-debtholder agency conflicts interact with strategic reporting under asymmetric information to influence bank regulation. Relative to a benchmark unregulated economy, higher capital requirements mitigate inefficient asset substitution, but potentially exacerbate underinvestment due to debt overhang. The optimal regulatory policy balances distortions created by agency conflicts and asymmetric information while incorporating the social benefit of bank debt. Asymmetric information and strategic reporting only impact regulation for intermediate social debt benefit levels. For lower social debt benefits in this interval, regulatory capital requirements are insensitive to accounting reports, so bank balance sheets need not be marked to market to implement the optimal regulatory policy. For higher social debt benefits, however, capital requirements are sensitive to accounting reports, thereby necessitating mark-to-market accounting to implement bank regulation. Mark-to-market accounting is essential when bank leverage levels are high, and is more likely to be necessary as banks' asset risk or specificity increases.

We develop a theory to show how external and internal corporate governance mechanisms affect innovation. We predict a U-shaped relation between innovation and external takeover pressure, which arises from the interaction between expected takeover premia and private benefits of control. Using ex ante and ex post innovation measures, we find strong empirical support for the predicted relation. We exploit the variation in takeover pressure created by the passage of antitakeover laws across different states. Innovation is fostered either by an unhindered market for corporate control or by antitakeover laws that are severe enough to effectively deter takeovers.

ABSTRACT We develop a model in which accounting information and prudential regulation interact to affect banks’ incentives to originate loans. Prudential regulators impose capital requirements to prevent banks from taking excessive risk. However, regulators cannot commit to ex ante efficient intervention and, instead, respond to ex post accounting information. We show that capital requirements and accounting measurement are substitutes when considered separately. By contrast, when considered jointly, accounting measurement and capital requirements are complementary tools that affect the level and efficiency of credit decisions. Comparative statics link capital requirements, quality of accounting information, and regulatory intervention to credit market conditions. An upshot of our analysis is that by appropriately optimizing the information from expected loss models, prudential regulators may design looser capital requirements to spur more bank lending. JEL Classifications: G21; G28; M41; M48.

ABSTRACT Formal theory and empirical research are complementary in building and advancing the body of knowledge in accounting in order to understand real‐world phenomena. We offer thoughts on opportunities for empiricists and theorists to collaborate, build on each other's work, and iterate over models and data to make progress. For empiricists, we see room for more descriptive work, more experimental work on testing formal theories, and more work on quantifying theoretical parameters. For theorists, we see room for theories explicitly tied to descriptive evidence, new theories on individuals' decision making in a data‐rich world, theories focused on accounting institutions and measurement issues, and richer theories for guiding empirical work and providing practical insights. We also encourage explicitly combining formal theory and empirical models by having both in one paper and by structural estimation.