Affiliated Banker on Board and Conservative Accounting

Abstract:     
We examine the effect of lending banks’ board representation (affiliated banker on board, or AFB) on conservative accounting. We argue that private information obtained through board representation enhances the monitoring and the influence of lenders and therefore reduces their demand for conservatism-facilitated debt contracting. Consistent with our hypothesis, we find that conservatism is markedly lower for AFB firms, even after controlling for a variety of confounding effects. In addition we find: (1) greater reduction in conservatism for AFB than for relationship banking, highlighting the uniqueness of board representation; (2) no reduction in conservatism when unaffiliated bankers are on board, suggesting the importance of affiliation with lender; and (3) lower use of covenants and lower sensitivity between conservatism and covenant intensity for AFB firms, suggesting that AFB substitutes for the conventional monitoring through conservatism-facilitated debt contracting.

Number of Pages in PDF File: 51

Keywords: financial reporting, private information, corporate governance, debt contracting

JEL Classification: G3, G21, M41

working papers series