Internal Control Quality and Information Asymmetry in the Secondary Loan Market

Review of Quantitative Finance and Accounting 43 (4): 683–720, 2014

48 Pages Posted: 30 Jun 2013 Last revised: 18 Mar 2016

See all articles by Dina El Mahdy, Ph.D., CFE

Dina El Mahdy, Ph.D., CFE

Morgan State University

Myung Seok Park

Virginia Commonwealth University (VCU) - School of Business

Date Written: June 29, 2013

Abstract

We examine the association between disclosure of internal control deficiencies (ICDs) and information asymmetry (IA) in the U.S. secondary loan market. We also investigate which types of ICDs intensify or mitigate conditions of information asymmetry in the same market. Relying on loan syndication, loan credit rating, financial debt covenants and loan size, we further explore the effect of loan specific characteristics on the association between ICDs and IA. Consistent with our predictions, we find that while ICDs increase information asymmetry in the secondary loan market, the inimitable characteristics in the secondary loan market (e.g., syndication, loan credit rating, financial covenants, and loan size) help to mitigate such negative consequences of the disclosure of ICDs on the firm’s informational environment. We further find that disclosures of ICDs for firms in regulated industries help to mitigate the negative consequences of ICDs disclosures on IA.

Keywords: Disclosure of internal control deficiencies, Information asymmetry, Secondary loan market, Loan-specific characteristics

JEL Classification: M41, G10

Suggested Citation

El Mahdy, Dina and Park, Myung Seok, Internal Control Quality and Information Asymmetry in the Secondary Loan Market (June 29, 2013). Review of Quantitative Finance and Accounting 43 (4): 683–720, 2014, Available at SSRN: https://ssrn.com/abstract=2287293

Dina El Mahdy (Contact Author)

Morgan State University ( email )

4100 Hillen Rd
Baltimore, MD 21218
United States
443-885-3967 (Phone)
443-885-8251 (Fax)

HOME PAGE: http://www.morgan.edu/

Myung Seok Park

Virginia Commonwealth University (VCU) - School of Business ( email )

301 W. Main St.
School of Business
Richmond, VA 23284-4000
United States
(804)828-3161 (Phone)

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