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New Accounting Rules for Loan Loss Provisions in Europe: Much Ado about Nothing?

Onali, Enrico and Ginesti, Gianluca (2015): New Accounting Rules for Loan Loss Provisions in Europe: Much Ado about Nothing?

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While there is a vigorous academic and policy debate about the implications of the Incurred Loss Model (ILM) for financial stability, there is no empirical evidence on whether the new Expected Loss Model (ELM) introduced by IASB benefits international investors. We address this relevant issue by investigating the price reaction to announcements related to the impairment rules incorporated in IFRS 9 on a sample of 137 European listed banks for the period from November 2009 to July 2014. We provide evidence that the abnormal returns related to these events are substantially uncorrelated with proxies of timely loss recognition, earnings management, and capital management, suggesting that the new ELM is not perceived to bring about substantial benefits as compared to the ILM. These results are robust to confounding events, international media coverage, and winsorizing techniques. Bootstrap analysis supports the hypothesis that significant results for some of the events and some of the proxies may be due to over-sized tests for the sample period under examination. Our findings shed light on a recent claim in the literature that the quality of financial statements bears at best second-order effects on firm value.

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