Loan Collateral and Financial Reporting Conservatism: Chinese Evidence
58 Pages Posted: 4 Sep 2013 Last revised: 18 Dec 2013
Date Written: September 3, 2013
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: Suggested Citation