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<p>We investigate the role of politicians’ horizon incentives in banks’ response to a forward-looking provisioning model. We argue that horizon incentives, defined as the tendency of politicians to focus on short-term performance in the late stage of an official term, motivate banks to use the discretion of provisioning to obfuscate reporting. Using the mandatory shift to the expected credit loss model in China, we find that the increases in the magnitudes and timeliness of loan loss provisions following the mandatory shift are smaller for state-owned banks with late-term local governors than for other state-owned banks. Further, while the mandate reduces lending pro-cyclicality during the COVID-19 recession for state-owned banks without late-term governors prior to the recession, it has little impact on other state-owned banks. Overall, our findings suggest that politicians’ horizon incentives lead to opportunistic underreporting of provisions and damp the effectiveness of financial reporting regulation in reducing lending pro-cyclicality.</p>

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Horizon problems in the implementation of bank reporting regulation: evidence from China

  • 期刊论文

  • 发表日期：

    2026年2月17日

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  • Mingyi Hung,
  • Yi Ru,
  • Guoman She,
  • Lynn Linghuan Wang

摘要

We investigate the role of politicians’ horizon incentives in banks’ response to a forward-looking provisioning model. We argue that horizon incentives, defined as the tendency of politicians to focus on short-term performance in the late stage of an official term, motivate banks to use the discretion of provisioning to obfuscate reporting. Using the mandatory shift to the expected credit loss model in China, we find that the increases in the magnitudes and timeliness of loan loss provisions following the mandatory shift are smaller for state-owned banks with late-term local governors than for other state-owned banks. Further, while the mandate reduces lending pro-cyclicality during the COVID-19 recession for state-owned banks without late-term governors prior to the recession, it has little impact on other state-owned banks. Overall, our findings suggest that politicians’ horizon incentives lead to opportunistic underreporting of provisions and damp the effectiveness of financial reporting regulation in reducing lending pro-cyclicality.