The Timeliness of Accounting Write-downs by U.S. Financial Institutions during the Financial Crisis of 2007-2008

This study examines the timeliness of write-downs taken by U.S. financial institutions during the financial crisis of 2007-2008. The timeliness of write-downs is measured by benchmarking the quarterly accounting write-down schedule with the devaluation schedule implied by credit indices such as the ABX. The results show that accounting write-downs are less timely than the devaluations implied by credit indices. In a cross-sectional analysis of the determinants of the timeliness of write-downs, I document that higher corporate governance quality is positively related to timelier write-downs. Furthermore, I observe that regulatory investigations and litigation pressure are positively related to the timeliness of write-downs, whereas the write-downs by firms with more complex exposures, higher financial leverage, and tighter regulatory constraints are less timely. In addition, I control for numerous exposure-specific characteristics and document that less risky exposures, and exposures that were affected later during the financial crisis, were written down later. Regarding the consequences of timeliness, this study finds that the exposure to risky assets is reflected faster in stock returns for firms with timelier write-downs.