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.

We study the economic impacts of adopting harmonized accounting standards when firms’ investments exhibit beauty contest features. We model harmonized accounting standards as common/correlated noises in firms’ accounting reports. We show that while more harmonized accounting standards have ambiguous effects on the reports’ informativeness in representing firms’ underlying fundamentals, they always reduce their usefulness in forecasting aggregate investments. Therefore, the stronger the beauty contest features, the more important the forecasts about the aggregate investment, thus calling for less harmonized accounting standards. We also find that, absent beauty contest features, mandatory adoption of harmonized accounting standards can be unnecessary; however, such a mandate is warranted when beauty contest features are strong as firms, when left on their own, would not voluntarily do so. Taken together, our results provide both a justification for and identification of an unintended consequence of the recent mandates toward adopting harmonized accounting standards.

Corporate managers are often better informed than outside investors about the uncertain future benefits of investments. However, information about investment prospects is not verifiable and therefore not amenable to direct disclosure, but instead inferred by investors from other accounting disclosures. Given this situation, we study the normative question of how the market’s perceptions of uncertainty and its beliefs about the expected level of future benefits of investment should factor into mandatory financial reports of investment expenditures. We establish a threshold of uncertainty in future benefits beyond which it is better to aggregate investment expenditures with cash flow from ongoing operations, rather than measuring and reporting the two separately. We obtain the surprising result that the higher the expectation of future benefits, the lower this uncertainty threshold should be.