Real Effects of Non-Concurrent Guidance from Accounting and Prudential Regulators: Evidence from CECL

This paper examines the real effects of non-concurrent guidance from accounting standard setters and prudential regulators. Using the recent introduction of the Current Expected Credit Losses (CECL) standard, we examine whether uncertainty due to the lack of concurrent guidance from accounting standard setters and bank regulators on the implementation and implications of CECL had counterproductive real effects. We hypothesize and find that banks significantly reduce loan amounts and offer stricter loan terms for affected loan facilities (term loan As, or TLAs) during the uncertainty period compared to those of unaffected loan facilities (term loan Bs, or TLBs). Furthermore, we show that the uncertainty period’s reduced credit supply adversely affects investments for firms dependent exclusively on TLAs compared to other borrowers. Cross-sectional tests show that the effect is stronger for firms that are frequent borrowers and likely to face financial constraints. The findings indicate that non-concurrent guidance from different regulatory agencies may affect the smooth functioning of affected economic entities.