The Effect of Timely Loan Loss Recognition in the Banking System on Firms’ Debt Structure

In this paper, we examine how the system under which banks record loan losses, specifically, the timeliness of loan loss recognition, affects borrowers’ debt structure. Using data from 55 countries, we find that more timely loan loss recognition reduces firms’ reliance on bank debt relative to public debt. This result reflects an equilibrium in which firms in an economy rely less on bank debt when there are greater lending constraints and more borrower monitoring in a more timely loan loss accounting regime. Consistent with such a regime resulting in  ighter loan conditions, we find an even lower use of bank debt in countries with stringent bank supervision and among financially constrained and opaque firms. Overall, our study offers new insight into the real effects of banks’ accounting on firms’ debt structure when firms can choose  lternative debt providers.