Timely Loan Loss Recognition in the Banking System and Firms’ Debt Structure

In this paper, we examine how the timeliness of loan loss recognition within the banking system affects borrowers' debt structure. Using data from 55 countries, we find that more timely loan loss recognition reduces firms' reliance on bank debt, consistent with firms relying less on bank debt due to more costly monitoring by banks. In addition, we find that this negative impact is more pronounced when there is stringer regulatory supervision of banks and among financially constrained and opaque firms. We further find that the negative impact is more pronounced in countries with more developed bond markets, consistent with such markets facilitating a switch from bank debt when banks impose more costly monitoring on firms