Evidence of Tying: An Accounting Perspective

Abstract:     
This study investigates tying in the banking industry and finds that large banks engage in tying activities. AFP survey findings indicate that lines of credit are the most likely credit instrument to be used in tying activities. Using the Feltham-Ohlson framework and the assumption that financial instruments should be zero net present value projects, this study finds that lines of credit are negative net present value projects, suggesting they are one side of a tying arrangement. Additionally, the new costs added by the implementation of the Basel Accord were not added to lines of credit, a further indication that strong pressure exists to maintain artificially low costs for lines of credit. Tying has potentially important accounting implications, specifically, transferring revenue between segments. If one side of the tying arrangement is with a bank and the other side is with the bank's affiliate, the result of this tying arrangement is unreliable revenue reporting and potentially mispriced equity.

Number of Pages in PDF File: 36

Keywords: revenue recognition, banking, lines of credit

JEL Classification: G21

Accepted Paper Series