The Role of Bank Reputation in 'Certifying' Future Performance Implications of Borrowers' Accounting Numbers

Journal of Accounting Research, 2012, Volume 50, Issue 4, 883-930.

69 Pages Posted: 3 Jan 2011 Last revised: 16 May 2016

See all articles by Robert M. Bushman

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School

Regina Wittenberg Moerman

University of Southern California

Date Written: February 11, 2012

Abstract

We investigate the role played by the reputation of lead arrangers of syndicated loans in mitigating information asymmetries between borrowers and lenders. We hypothesize that syndications by more reputable arrangers are indicative of higher borrower quality at loan inception and more rigorous monitoring during the term of the loan. We investigate whether borrowers with more reputable lead arrangers realize superior performance subsequent to loan origination relative to borrowers with less reputable arrangers. We further examine whether certification by high reputation lead banks extends to the quality of borrowers’ reported accounting numbers. Controlling for endogenous matching of borrowers and lead banks, we find that higher bank reputation is associated with higher profitability and credit quality in the three years subsequent to loan initiation. We also show that bank reputation is associated with long run sustainability of earnings via higher earnings persistence, and debt contracting value of accounting via a stronger connection between pre-loan profitability and future credit quality. We further document that the enhanced earnings sustainability associated with higher reputation lead banks reflects both superior fundamentals and accruals more closely linked with future cash flows.

Keywords: bank reputation, earnings quality, earnings persistence, syndicated loan market, debt contracting, bank certification, arranger of syndication

JEL Classification: D82, G21, G38, M41

Suggested Citation

Bushman, Robert M. and Wittenberg Moerman, Regina, The Role of Bank Reputation in 'Certifying' Future Performance Implications of Borrowers' Accounting Numbers (February 11, 2012). Journal of Accounting Research, 2012, Volume 50, Issue 4, 883-930., Available at SSRN: https://ssrn.com/abstract=1734071 or http://dx.doi.org/10.2139/ssrn.1734071

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-9809 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/bushmanr/

Regina Wittenberg Moerman (Contact Author)

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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