Loan Collateral and Financial Reporting Conservatism: Chinese Evidence

58 Pages Posted: 4 Sep 2013 Last revised: 18 Dec 2013

See all articles by Jeff Zeyun Chen

Jeff Zeyun Chen

Texas Christian University

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Yanyan Wang

Xiamen University

Lisheng Yu

Xiamen University

Date Written: September 3, 2013

Abstract

We examine the relation between the use of collateral and financial reporting conservatism for a sample of Chinese firms. In the absence of flexibility in risk pricing through interest rates and strong contract enforcement in China, we find that lenders reduce collateral requirements from more conservative borrowers and that this negative relation is significantly moderated by borrowers’ poor credit quality and low asset tangibility. Our finding that conservatism can result in a tangible benefit in the form of lower collateral requirements indicates that lenders value financial reporting conservatism. However, the benefit from financial reporting conservatism is muted as lenders become more concerned about borrowers’ default risk or ability to pledge tangible assets as collateral against loans.

Keywords: Loan collateral, Financial reporting conservatism, Debt contracting, Default risk, Asset tangibility

JEL Classification: G21, G32

Suggested Citation

Chen, Jeff Zeyun and Lobo, Gerald J. and Wang, Yanyan and Yu, Lisheng, Loan Collateral and Financial Reporting Conservatism: Chinese Evidence (September 3, 2013). Journal of Banking and Finance, Vol. 37, No.12, pp. 4989–5006, December 2013 , Available at SSRN: https://ssrn.com/abstract=2320164 or http://dx.doi.org/10.2139/ssrn.2320164

Jeff Zeyun Chen (Contact Author)

Texas Christian University ( email )

2900 Lubbock Ave
Fort Worth, TX 76109
United States

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo

Yanyan Wang

Xiamen University ( email )

Xiamen, Fujian 361005
China

Lisheng Yu

Xiamen University ( email )

Xiamen, Fujian 361005
China

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