Affiliated Banker on Board and Conservative Accounting

51 Pages Posted: 27 Oct 2011 Last revised: 25 Apr 2012

See all articles by David H. Erkens

David H. Erkens

Georgetown University - Robert Emmett McDonough School of Business

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting

Jieying Zhang

The University of Texas at Dallas

Date Written: April 24, 2012

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.

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

JEL Classification: G3, G21, M41

Suggested Citation

Erkens, David Hendrik and Subramanyam, K.R. and Zhang, Jieying, Affiliated Banker on Board and Conservative Accounting (April 24, 2012). Available at SSRN: https://ssrn.com/abstract=1950016 or http://dx.doi.org/10.2139/ssrn.1950016

David Hendrik Erkens (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States

K.R. Subramanyam

University of Southern California - Leventhal School of Accounting ( email )

Los Angeles, CA 90089-0441
United States
213-740-5017 (Phone)
213-747-2815 (Fax)

Jieying Zhang

The University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083-0688
United States

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