Digital Lending and Financial Well-Being: Through the Lens of Mobile Phone Data.

With AJ Chen, Omri Even-Tov, and Jung Koo Kang, Accounting Review, forthcoming.

To mitigate information asymmetry about borrowers in developing economies, digital lenders utilize machine-learning algorithms and nontraditional data from borrowers’ mobile devices. Consequently, digital lenders have managed to expand access to credit for millions of individuals lacking a prior credit history. However, short-term, high-interest digital loans have raised concerns about predatory lending practices. To examine how digital credit influences borrowers’ financial well-being, we use proprietary data from a digital lender in Kenya that randomly approves loan applications that would have otherwise been rejected based on the borrower’s credit profile. We find that access to digital credit improves borrowers’ financial well-being across various mobile-phone-based well-being measures, including monetary transactions and balances, mobility, and social networks, as well as borrowers’ self-reported income and employment. We further show that this positive impact is more pronounced when borrowers have limited access to credit, take loans for business purposes, and obtain more credit.

Information Preference and Credit Allocation in a Bazaar Economy.

With Rimmy Tomy, Management Science, forthcoming.

Traders operating in informal economies tend to use non-accounting metrics in their credit allocation decisions. By using a combination of survey questions and a hypothetical choice experiment, we explore wholesalers' preferences for retailers' accounting information and, importantly, the reasons for its limited use. Based on estimates of wholesalers' willingness to pay for retailer information, we find that although wholesalers continue to value non-accounting information such as retailers' community membership and relationship length, they also overwhelmingly value their sales and profits in making credit decisions. However, wholesalers do not use accounting information because they perceive it to be unreliable, and retailers do not share this information because they feel it will be misused. Our findings suggest that improving the reliability of accounting information and preventing its misuse will increase the use of such information in credit allocation in informal markets.

Exposure to Superstar Firms and Financial Distress.

With Stephanie Cheng, Dushyantkumar Vyas and Wuyang Zhao, Review of Accounting Studies, forthcoming.

A small minority of highly successful firms (referred to as superstar firms) have captured large market shares and earned massive profits in recent decades. In this study, we examine whether superstar firms are associated with a greater likelihood of financial distress of firms that are exposed to them in product markets. Building on recent research that shows that superstar firms are associated with increasing aggregate markups, we identify superstars as firms with the highest markups in the industry and whose industry markup share is increasing over time. We then measure a focal firm’s overall product market exposure to superstars by employing product similarity scores. We document that firms with greater exposure to superstars in product markets are more likely to subsequently file for bankruptcy. We also shed light on the underlying channels through which superstar exposure is associated with bankruptcy and show that firms with the greater superstar exposure exhibit weaker financial performance and greater riskiness. Furthermore, we show that the association between superstar exposure and the likelihood of bankruptcy is stronger when superstar firms have greater market power. This association is also concentrated among focal firms that are less innovative, have lower credit financing flexibility, and those with less favorable product market attributes, as these firms are less likely to withstand the competitive pressure from superstar firms. Finally, we triangulate our primary evidence by providing suggestive evidence that sophisticated market participants account for the adverse effects of superstar exposure in their decision-making.

Unexpected Defaults: The Role of Information Opacity.

With Aytekin Ertan and Yun Lee, Review of Accounting Studies, forthcoming.

Bond defaults are undesirable yet natural outcomes of risky investments. What is also crucial but hitherto underexplored is the unexpectedness of defaults. We develop a parsimonious measure of default unexpectedness and highlight its economic importance by demonstrating that unexpected defaults are associated with unfavorable recovery outcomes and adverse price changes in peer firm bonds. We then examine how default unexpectedness relates to information opacity. We find that firms with opaque financial reporting and weak voluntary disclosure experience more unexpected defaults. Defaults also occur more unexpectedly when the external information environment is opaque—when rating agencies disagree on a firm’s credit risk and when the media coverage is low. We further report evidence on a specific case in which transparent firms suffer unexpected defaults—when creditors’ run incentives are particularly high. Overall, our paper introduces default unexpectedness as an economically relevant construct, offers a tractable measure, and highlights the role of transparency in mediating this phenomenon.

Community Membership and Reciprocity in Lending: Evidence from Informal Markets.

With Rimmy Tomy, Journal of Accounting and Economics, 78, 2024.

We study credit access 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 bazaar in India, we find that community membership plays a vital role in access to credit. Wholesalers are more likely to provide credit and offer greater amounts of credit to within-community retailers, and are more lenient when these retailers are delinquent. Furthermore, wholesalers who lent preferentially to their community retailers pre-COVID are more likely to receive help from their community following the COVID-19–related income shock, particularly from same-community landlords and suppliers. Also, wholesalers with low endowments, those with greater within-community information flow about them, and those facing income shocks are more likely to provide preferential credit to their community retailers. Our findings are consistent with an indirect reciprocity mechanism explaining within-community credit flows.

Strategic Syndication: Is Bad News Shared in Loan Syndicates?

With Andrea Down and Christopher Williams, Review of Accounting Studies, 29, 2024.

We investigate whether lead arrangers opportunistically withhold their private information from participant lenders and how this behavior affects the structure of loan syndicates. Using the setting of FDA inspections and the exogenous shock to the inspection disclosure regime with the passage of the Open Government Initiative (OGI), we show that following bad inspection outcomes lead arrangers retain a larger loan share in the post-OGI period, when inspection outcomes are publicly disclosed by the FDA, compared to the pre-OGI period, when there is no public disclosure. We also find that during the pre-OGI period lead arrangers retain a lower loan share when a loan is issued following bad inspection outcomes compared to clean inspection outcomes. This effect is stronger when lead arrangers are more likely to be informed (as measured by their prior experience submitting FOIA requests to the FDA and a higher inspection materiality) and when syndicate participants are less likely to be informed (as measured by the lack of their prior FDA FOIA requests and lead arranger experience, and the lack of borrowers’ voluntary disclosure of inspection outcomes). Our findings of the deterioration in borrowers’ performance following bad inspection outcomes and lead arrangers’ reputational losses in the post-OGI period further indicate lead arrangers’ opportunistic behavior. Overall, our results provide robust evidence that lead arrangers exploit their informational advantage at the expense of participant lenders.

Contracting in the Dark: The Rise of Public-Side Lenders in the Syndicated Loan Market

With Hami Amiraslani, John Donovan and Matthew Phillips, Journal of Accounting and Economics, 76, 2023.

We document a novel trend in syndicated lending where some participants voluntarily waive their rights to borrowers’ private information. We posit that “public-side” lending emerged to facilitate broad lender participation in the syndicated loan market by mitigating concerns about the leakage of borrowers’ private information into public securities markets. In line with this proposition, we find that public-side lending facilitates the loan market participation of lenders for which maintaining robust information barriers is particularly costly. Furthermore, while public-side lending increases within-syndicate information asymmetry, our findings indicate that it does not materially increase interest spreads and is associated with lower coordination costs among syndicate participants. Collectively, we document how debt contracting practices evolved to address frictions associated with the protection of borrowers’ private information and the related changes in loan contracting equilibria.

Institutional Dual-Holders and Managers’ Earnings Disclosure

With Leila Peyravan, The Accounting Review, 97, 2022.

We investigate how institutional (non-commercial bank) investors that simultaneously invest in a firm’s debt and equity (dual-holders) influence the firm’s voluntary disclosure. Because institutional dual-holders trade on private information gleaned through lending relationships, we predict and find that borrowers increase earnings forecast disclosure to reduce these investors’ information advantage following the origination of loans with their participation. We also show that the increase in disclosure is stronger when the access to a borrower’s private information endows dual-holders with a greater information advantage and when the consequences of this access are likely to be more pronounced for the firm. We further find that institutional dual-holders earn excess returns when trading equity of non-guider firms following loan origination, but not when firms issue guidance, confirming that earnings disclosure helps level the playing field among investors. Our findings highlight that firms actively use disclosure to mitigate the adverse effect of dual-holders on their information environment.

The Harmonization of Lending Standards within Banks through Mandated Loan-Level Transparency

With Jung Koo Kang and Maria Loumioti, Journal of Accounting and Economics, 72, 2021.

We explore whether the introduction of transparent reporting rules increases credit standard harmonization within a bank. We exploit the new loan-level reporting rules imposed on banks that borrow from the European Central Bank using repurchase agreements collateralized by their asset-backed securities. We compare credit terms of similar mortgages issued by a bank across a country’s regions and find that harmonization increases following the adoption of the new reporting rules. Learning and regulatory scrutiny constitute mechanisms underlying this economic effect. We also show that harmonization leads to more favorable lending terms to borrowers and higher loan quality for banks. Overall, these findings suggest that transparent reporting rules incentivize banks to improve their internal decision-making and thereby reduce regional divergence in their credit standards.

Accounting Quality and Debt Concentration.

With Ningzhong Li, Yun Lou and Clemens Otto, The Accounting Review, 96, 2021.

We examine the relation between accounting quality and debt concentration in corporate capital structures (i.e., firms’ tendency to rely predominantly on only a few types of debt). Motivated by theoretical and empirical research that supports a strong link between debt concentration and creditors’ coordination costs and the importance of accounting quality in reducing these costs, we hypothesize that firms with higher accounting quality have less concentrated debt structures. Measuring accounting quality with a comprehensive index based on the occurrence of material internal control weaknesses, accounting restatements, SEC AAERs, and firms’ reliance on small auditors, we find that higher accounting quality is indeed associated with less concentrated debt structures. This relation is stronger for firms with higher default risk, as the probability that creditors need to coordinate is higher, and for firms with lower liquidation values, as creditor coordination to avoid liquidation is more important.

CDS Trading and Non-Relationship Lending Dynamics.

With Jung Koo Kang and Christopher Williams, Review of Accounting Studies, 26, 2021.

We investigate how credit default swaps (CDSs) affect lenders’ incentives to initiate new lending relationships. We predict that CDSs reduce adverse selection that non-relationship lead arrangers face when competing for loans. Consistently, we find that a loan is more likely to be syndicated by a non-relationship lead arranger following CDS trading initiation on a borrower’s debt. We also show that borrowers that obtain loans from non-relationship lead arrangers in the post-CDS trading initiation period are more opaque, in line with the effect of CDSs being more pronounced for borrowers for which adverse selection costs are higher. Further analyses show that relative to relationship lead arrangers, non-relationship lead arrangers have lower monitoring incentives in the post period, as reflected by less restrictive covenants and performance pricing provisions they impose and by the reduced loan shares they retain. Moreover, we find that borrowers of non-relationship lead arrangers following CDS trading initiation have higher growth opportunities and more volatile operations, consistent with such borrowers benefiting to a greater extent from weaker restrictions on their activities imposed by lenders. Lastly, lower monitoring incentives of CDS-protected non-relationship lead arrangers also decrease the propensity of inexperienced participants to join their syndicates. Overall, our findings suggest that CDS trading significantly changes non-relationship lending dynamics.

Similarity in the Restrictiveness of Bond Covenants

With Gus De Franco, Florin Vasvari and Dushyantkumar Vyas, The European Accounting Reviewer, 29, 2020

We examine the economic determinants and consequences associated with the inclusion of covenants with similar levels of restrictiveness in bond contracts. Using a unique Moody’s bond covenant dataset, we develop measures that capture similarity in the restrictiveness of bond covenants relative to previously issued peer bonds. We document that the demand for similarity by issuers, their advisors and bond investors follows the predictions of sociological and economic theories. Further, consistent with similarity in covenants reducing bond investors’ information acquisition and processing costs, we show that bonds with more similar covenant restrictiveness receive lower yields at issuance. These bonds are also more likely to be held by long-term bond investors, such as insurance companies, and are characterized by greater liquidity in the secondary market, providing a partial explanation for the lower bond yields. Our results highlight the benefits of covenant similarity and suggest that the use of covenants with similar restrictiveness levels brings information acquisition and processing cost savings that may be larger than the monitoring benefits provided by covenants with more tailored features.

Making Sense of Soft Information: Interpretation Bias and Loan Quality.

With Dennis Campbell and Maria Loumioti, Journal of Accounting and Economics, 68, 2019

We explore how cognitive constraints can impede the effective processing and interpretation of less salient, non-quantitative (soft) information in private lending. Taking advantage of the internal reporting system of a large federal credit union, we delineate four important constraints likely to affect the lending process: (1) limited attention (or distraction), (2) task-specific human capital, (3) peer perception and (4) learning over the credit cycle. Specifically, we find that utilizing soft information in lending decisions leads to worse credit outcomes when loan officers are busy or before weekends and national holidays; when loan officers had earlier non-banking and, in particular, sales-related experience; when both officers and borrowers are men and when loan officers are members of informal organizational networks; and during periods of credit expansion. Overall, we provide novel evidence of non-agency-related costs in the use of soft information in credit decisions.

Featured in Bloomberg (“Bros Don’t Let Bros Lend Money”), April 2017

Featured in MarketWatch (“The reason your loan application is rejected may have nothing to do with your credit score”), April 2017.

Featured in American Banker (“When 'soft' data improves loan decisions, and when it doesn't), May 2017.

The Effect of Information Opacity and Accounting Irregularities on Personal Lending Relationships: Evidence from Lender and Manager Co-migration

With Urooj Khan, Xinlei Li and Chris Williams, The Accounting Review, 94, 2019

We examine how personal lending relationships between lenders and managers are affected by information and accounting environments of borrowing firms. We address this question by exploring whether, following managerial turnover, lenders migrate with the manager from the firm where a relationship developed (origin firm) to the manager's new firm (destination firm). We find that the opacity of the external information environment of the destination firm significantly increases the probability of lenders' co-migration, while accounting irregularities at both the destination and origin firms decrease it. We also show that co-migration is affected by a lender's monitoring efficiency. A lender's monitoring efficiency increases its co-migration probability when a manager moves to an opaque firm, but not when she moves to a transparent one. When the destination or origin firm experiences accounting irregularities, even lenders with strong monitoring capabilities are mostly reluctant to continue their relationship with a migrating manager.

Credit Default Swaps and Managers’ Voluntary Disclosure.

With Jae Kim, Pervin Shroff and Dushyantkumar Vyas, Journal of Accounting Research, 56, 2018.

We investigate how the availability of traded credit default swaps (CDSs) affects the referenced firms’ voluntary disclosure choices. CDSs enable lenders to hedge their credit risk exposure, weakening their incentives to monitor borrowers. We predict that reduced lender monitoring in turn leads shareholders to intensify their monitoring and demand increased voluntary disclosure from managers. Consistent with this expectation, we find that managers are more likely to issue earnings forecasts and forecast more frequently when traded CDSs reference their firms. We further find a stronger impact of CDS availability on firm disclosure when (1) lenders have higher ability and propensity to hedge credit risk using CDSs, and (2) lender monitoring incentives and monitoring strength are weaker. Consistent with an increase in shareholder demand for public information disclosure induced by a reduction in lender monitoring, we find a stronger effect of CDSs on voluntary disclosure for firms with higher institutional ownership and stronger corporate governance. Overall, our findings suggest that firms with traded CDS contracts enhance their voluntary disclosure to offset the effect of reduced monitoring by CDS‐protected lenders.

Featured in Columbia Law School’s Blue Sky Blog (How Credit Default Swaps Affect Managers’ Voluntary Disclosure, September 2018).

Top 20 Most Downloaded Articles published between 2017-2018, Journal of Accounting Research.

Enhancing Loan Quality through Transparency: Evidence from the European Central Bank Loan Level Reporting Initiative.

With Aytekin Ertan and Maria Loumioti, Journal of Accounting Research, 55, 2017.

We explore whether transparency in banks’ securitization activities enhances loan quality. We take advantage of a novel disclosure initiative introduced by the European Central Bank, which requires, as of January 2013, banks that use their asset‐backed securities as collateral for repo financing to report securitized loan characteristics and performance in a standardized format. We find that securitized loans originated under the transparency regime are of better quality with a lower default probability, a lower delinquent amount, fewer days in delinquency, and lower losses upon default. Additionally, banks with more intensive loan level information collection and those operating under stronger market discipline experience greater improvement in their loan quality under the new reporting standards. Overall, we demonstrate that greater transparency has real effects by incentivizing banks to improve their credit practices.

The Informational Role of the Media in Private Lending.

With Robert Bushman and Christopher Williams, Journal of Accounting Research, 55, 2017

We investigate whether a borrower's media coverage influences the syndicated loan origination and participation decisions of informationally disadvantaged lenders, loan syndicate structures, and interest spreads. In syndicated loan deals, information asymmetries can exist between lenders that have a relationship with a borrower and less informed, nonrelationship lenders competing to serve as lead arranger on a syndicated loan, and also between lead arrangers and less informed syndicate participants. Theory suggests that the aggressiveness with which less informed lenders compete for a loan deal increases in the sentiment of public information signals about a borrower. We extend this theory to syndicated loans and hypothesize that the likelihood of less informed lenders serving as the lead arranger or joining a loan syndicate is increasing in the sentiment of media‐initiated, borrower‐specific articles published prior to loan origination. We find that as media sentiment increases (1) outside, nonrelationship lenders have a higher probability of originating loans; (2) syndicate participants are less likely to have a previous relationship with the borrower or lead bank; (3) lead banks retain a lower percentage of loans; and (4) loan spreads decrease.

Dynamic Threshold Values in Earnings-Based Covenants.

With Ningzhong Li and Florin Vasvari. Journal of Accounting and Economics, 61, 2016.

We examine the role of dynamic covenant threshold values in syndicated loan agreements. We document that 45% of syndicated loans specify dynamic covenant thresholds in earnings-based covenants and that these changing thresholds typically become tighter over the life of a loan. We find that covenants with a tight trend provide an important signaling mechanism that meets the needs of borrowers that experience an inferior financial performance at loan initiation but expect future performance improvements. Specifically, we find that these covenants provide underperforming borrowers with a grace period by requiring less restrictive initial thresholds. At the same time, they allow these borrowers to credibly convey information to lenders about their future prospects via gradually more demanding subsequent thresholds. Our empirical evidence also suggests that while lenders entering into tight threshold trend covenant contracts receive weaker covenant protection over the grace period, they benefit from having stronger control rights in subsequent periods.

Accounting Information in Financial Contracting: The Incomplete Contract Theory Perspective.

With Hans Christensen and Valeri Nikolaev. Journal of Accounting Research, 54, 2016.

This paper reviews theoretical and empirical work on financial contracting that is relevant to accounting researchers. Its primary objective is to discuss how the use of accounting information in contracts enhances contracting efficiency and to suggest avenues for future research. We argue that incomplete contract theory broadens our understanding of both the role accounting information plays in contracting and the mechanisms through which efficiency gains are achieved. By discussing its rich theoretical implications, we expect incomplete contract theory to prove useful in motivating future research and in offering directions to advance our knowledge of how accounting information affects contract efficiency.

Top 10 Most Cited Articles in 2017, Journal of Accounting Research.

Media Coverage and the Stock Market Valuation of TARP Participating Banks.

With Florin Vasvari and Jeffrey Ng. The European Accounting Review, 24, 2015.

We examine the impact of media coverage of the Capital Purchase Program (CPP) under the Troubled Assets Relief Program on the equity market valuation of participating bank holding companies (CPP banks). We document substantial negative coverage of the CPP and its participants over the five quarters following the program's initiation. We find that the extent of negative media coverage about the CPP exerted substantial downward pressure on the stock returns of CPP banks, decreasing their valuation relative to bank holding companies not participating in the program. We show that our findings cannot be explained by differences in the banks’ financial viability at the CPP's initiation, new information about their performance being released to the market after the CPP's initiation or preceding stock returns causing the negative media coverage. Our findings highlight the importance of investor sentiment, as reflected by the tone of media coverage, in banks’ valuation during a period of high uncertainty in financial markets.

A Debt Analysts’ View of Debt-Equity Conflicts of Interest.

With Gus De Franco, Florin Vasvari and Dushyantkumar Vyas. The Accounting Review, 89, 2014.

We investigate how the tone of sell-side debt analysts' discussions about debt-equity conflict events affects the informativeness of debt analysts' reports in debt markets. Conflict events such as mergers and acquisitions, debt issuance, share repurchases, or dividend payments potentially generate asset substitution or wealth expropriation by equity holders. We document that debt analysts routinely discuss these conflict events in their reports. More importantly, discussions about conflict events that we code as negative are associated with increases in credit spreads and bond trading volume. Consistent with the informational value of debt analysts' discussions in secondary debt markets, we find that negatively coded conflict discussions predict higher bond offering yields in the primary bond market. In additional analyses, we measure the tone of debt analysts' discussions based on their disagreement with the tone of equity analysts' discussions and find that the informativeness of debt analysts' reports is higher when our coding indicates that conflict events are viewed negatively by debt analysts but positively by equity analysts.

The Role of Bank Reputation in “Certifying” Future Performance Implications of Borrowers’ Accounting Numbers.

With Robert Bushman, Journal of Accounting Research, 50, 2012.

We investigate the role played by the reputation of lead arrangers of syndicated loans in mitigating information asymmetries between borrowers and lenders. We hypothesize that syndications by more reputable arrangers are indicative of higher borrower quality at loan inception and more rigorous monitoring during the term of the loan. We investigate whether borrowers with more reputable lead arrangers realize superior performance subsequent to loan origination relative to borrowers with less reputable arrangers. We further examine whether certification by high‐reputation lead banks extends to the quality of borrowers’ reported accounting numbers. Controlling for endogenous matching of borrowers and lead banks, we find that higher bank reputation is associated with higher profitability and credit quality in the three years subsequent to loan initiation. We also show that bank reputation is associated with long‐run sustainability of earnings via higher earnings persistence, and debt contracting value of accounting via a stronger connection between pre‐loan profitability and future credit quality. We further document that the enhanced earnings sustainability associated with higher reputation lead banks reflects both superior fundamentals and accruals more closely linked with future cash flows.

The Impact of Financial Reporting Quality on Debt Contracting: Evidence from the Internal Control Weakness Reports.

With Anna Costello, Journal of Accounting Research, 49, 2011.

We examine the effect of financial reporting quality on the trade‐off between monitoring mechanisms used by lenders. We rely on Sarbanes‐Oxley internal control reports to measure financial reporting quality. We find that when a firm experiences a material internal control weakness, lenders decrease their use of financial covenants and financial‐ratio‐based performance pricing provisions and substitute them with alternatives, such as price and security protections and credit‐rating‐based performance pricing provisions. We also find that changes in debt contract design following internal control weaknesses are substantially different from those following restatements, where lenders impose tighter monitoring on managers’ actions, but do not decrease their use of financial statement numbers.

Top 10 Most Cited Articles published between 2011-2015, Journal of Accounting Research.

Top 25 Most Cited Articles in 2015, Journal of Accounting Research.

Top 25 Most Cited Articles in 2014, Journal of Accounting Research

Winner of Ernest R. Wish Accounting Research Award, 2011.

Price Discovery and Dissemination of Private Information by Loan Syndicate Participants.

With Robert Bushman and Abbie Smith, Journal of Accounting Research, 48, 2010.

We delineate key channels through which flows of confidential information to loan syndicate participants impact the dynamics of information arrival in prices. We isolate the timing of private information flows by estimating the speed of price discovery over quarterly earnings cycles in both secondary syndicated loan and equity markets. We identify borrowers disseminating private information to lenders relatively early in the cycle with firms exhibiting relatively early price discovery in the secondary loan market, documenting that price discovery is faster for loans subject to financial covenants, particularly earnings‐based covenants; for borrowers who experience covenant violations; for borrowers with high credit risk; and for loans syndicated by relationship‐based lenders or highly reputable lead arrangers. We then ask whether early access to private information in the loan market accelerates the speed of information arrival in stock prices. We document that the stock returns of firms identified with earlier private information dissemination to lenders indeed exhibit faster price discovery in the stock market, but only when institutional investors are involved in the firm's syndicated loans. Further, the positive relation between institutional lending and the speed of stock price discovery is more pronounced in relatively weak public disclosure environments. These results are consistent with institutional lenders systematically exploiting confidential syndicate information via trading in the equity market.

Featured in Capital Ideas (“Privileged Lending”), March 2011.

The Informational Role of Bond Analysts.

With Gus De Franco and Florin Vasvari, Journal of Accounting Research, 47, 2009.

This study uses a large sample of sell‐side bond analysts' reports to examine the properties of recommendations provided by bond analysts and the impact of these recommendations on bond securities. First, we document that the distribution of bond analysts' buy, hold, and sell recommendations is skewed positively, but less so than the distribution of equity analysts' recommendations. The positive skewness in bond analysts' recommendations is greater for low than for high credit quality bonds. Second, we find that bond analysts' reports generate bond trading and return reactions that are both economically significant and greater for low credit quality bonds. The bond market reaction is greater for bond analysts' reports than for equity analysts' reports. Finally, while both bond and equity analysts lead rating agency announcements, we find no evidence of a difference in timeliness between bond and equity analysts' reports. Overall, our results are consistent with bond analysts issuing more negative reports than equity analysts and providing more information about low credit quality bonds as a result of the asymmetric demand for negative information by bond investors.

The Role of Information Asymmetry and Financial Reporting Quality in Debt Trading: Evidence from the Secondary Loan Market.

Journal of Accounting and Economics, 46, 2008.

I explore which firm and loan characteristics decrease or exacerbate information asymmetry in the trading of private debt. I find that loans of public firms, loans with an available credit rating, loans of profit firms and loans syndicated by more reputable arrangers are traded at lower bid–ask spreads, while revolvers, distressed loans and loans issued by institutional investors are associated with higher information costs. I also find that timely loss recognition reduces the bid–ask spread. This finding suggests that conservative reporting decreases information asymmetry regarding a borrower and increases the efficiency of the secondary trading of debt securities.

Winner of the Best Paper Prize by the Journal of Accounting and Economics.

Awarded for the most innovative paper published in the Journal of Accounting and Economics in 2008 that is likely to have the greatest impact on the profession.

Assessing Credit Risk in Israel’s Banking System by Means of a Credit Scoring Model.

The Economic Quarterly, 48, 2001.

Among the various risks to which the commercial banks are exposed, credit risk has always been considered the most significant, and one whose realization could undermine a bank's stability. The main object of this study is to examine whether credit scoring models provide an accurate estimation of credit risk, and whether they are applicable to Israel's banking system. These models weight the borrower's financial relations by coefficients of importance, thereby creating an index that reflects the borrower's relevant credit rating or the probability that he will be unable to pay his debts (insolvency). For the purpose of the study a sample of 82 public companies in Israel was built, half of which failed to meet their commitments to the banking system and half which were stable. All the firms were traded on the Tel-Aviv stock exchange during the period 1994—1998. The study made use of the financial statements of the sampled companies and the database of the Banking Supervision Department, which includes data on the extent and quality of the credit they received. Characteristics of failing companies were examined, and variables liable to serve as effective indicators of insolvency were determined. The relative importance of these factors was examined, and a prediction equation of financial difficulties was constructed. According to the model, the level of prediction of insolvency was 83 percent one year before the event, and 79 percent three years earlier. The model's overall level of accuracy (for all the firms, including the stable ones) during the period examined was about 70 percent. The model was successful in distinguishing between insolvency and stability, so that a risk index based on financial ratios could signal imminent insolvency several years before it actually occurs. The study could contribute to developing a model for estimating credit risk and its realization, with applicability to Israel's banking system. The model could be used by both the banking system — to manage risks and to make business decisions — and the supervisory authorities, for the purpose of determining policy.