DeGroote School of Business

Organizational Memory and Bank Accounting Conservatism

Author(s): Justin Yiqiang Jin, Yi Liu, S.M. Khalid Nainar
Web Index: 2020-09
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Abstract

This paper is the first to investigate the impact of banks’ organizational memory of past history on the conservatism of accounting policy. Specifically, we investigate two types of bad time history: banks’ undercapitalization and the failures of other banks during financial crises. Using a large sample of U.S. banks over the period 1997-2013, we find that both types of bad times are positively related to timelier recognition of earnings decreases versus earnings increases in accounting income. We also find that following bad times, banks increase their allowance for loan losses. The results of path analysis and survey research indicate that bad time memory of banks impacts bank accounting conservatism through CEO tenure and board of directors’ tenure. Collectively, our results suggest that banks’ organizational memory of bad times and macro-level banking crises lead to greater accounting conservatism in banks.

Valuation Insight

Banks’ organizational memory of bad times (undercapitalization or failures of other banks) leads to greater accounting conservatism in banks. Thus, we may expect banks that went through bad times to have lower book-to-market values.

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