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http://ssrn.com/abstract=2327378
 
 

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Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans


Michael Minnis


University of Chicago - Booth School of Business

Andrew G. Sutherland


University of Chicago - Booth School of Business

February 3, 2014

Chicago Booth Research Paper No. 13-75

Abstract:     
We use a proprietary database of bank information requests to small commercial firms to examine the role of financial statements in monitoring borrowers. In this setting financial reporting is not mandated by regulation, but is the equilibrium outcome of negotiation between the bank and borrower. We find that while financial statements are the most commonly requested item in the dataset, they are requested for only half of the loans. Moreover, we find that alternative contracting mechanisms mediate financial statement requests on both the extensive and intensive margins. Collectively, our results provide novel evidence of the fundamental demand for financial reporting in debt contracting and the manner in which banks fulfill their role as delegated monitors.

Number of Pages in PDF File: 47

Keywords: loan monitoring, financial contracting, collateral, debt, relationship lending, taxes

JEL Classification: G21, G24, G28, G32, H25, H32

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Date posted: September 19, 2013 ; Last revised: February 4, 2014

Suggested Citation

Minnis, Michael and Sutherland, Andrew G., Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans (February 3, 2014). Chicago Booth Research Paper No. 13-75. Available at SSRN: http://ssrn.com/abstract=2327378 or http://dx.doi.org/10.2139/ssrn.2327378

Contact Information

Michael Minnis (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 South Woodlawn Avenue
Chicago, IL 60637
United States
Andrew G. Sutherland
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
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