External Financing Needs and Early Adoption of Accounting Standards: Evidence from the Banking Industry

Economic intuition and theories suggest that banks are motivated to voluntarily disclose information and signal their quality, for example, through early adoption of accounting standards, to better access capital markets. Examining accounting standards from January 1995 to March 2008, I find that US bank holding companies (BHCs) with lower profitability and higher risk profiles are more likely to choose early adoption. This evidence is consistent with a BHC’s incentive to better access external financing through information disclosure and signaling. Moreover, a counter-signaling effect of decisions not to early adopt is first identified because early-adopting BHCs are not necessarily the least risky and the most profitable. I also find the counter-signaling effect to be most evident when an accounting standard has no effect on the financial statement proper (i.e., only disclosure requirements). This finding complements prior research that managers treat recognition and disclosure differently and that financial statement users weigh more on recognized than disclosed values. Finally, the results show that early adopters generally experience higher fund growth in uninsured debts than matched late adopters in economic expansions, times when BHCs are most motivated to obtain funds. This finding is consistent with the bank capital structure literature that banks have shifted towards nondeposit debts to finance their balance sheet growth.