Internal Control Quality and Information Asymmetry in the Secondary Loan Market

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