Abstract
Banks that follow conditional conservatism on average benefit from a reduction in future stock price crash risk. The key discretionary loan loss accounting channels are provisions and allowances. We show that conservatism reduces the crash risk of small banks during periods of credit contraction and boom, but that for large banks the risk of stock price crashes is not reduced by more conservative accounting, even for those with higher levels of opacity. Hence regulation for conservative bank loan loss accounting does not present a significant opportunity to limit systemic effects arising from the crash risk of large banks.
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