Insider Lending, Conservatism, and Accounting Standards

39 Pages Posted: 27 Mar 2014 Last revised: 21 Jun 2017

See all articles by Jochen Bigus

Jochen Bigus

Free University Berlin, Department Accounting and Finance

Hendrik Hakenes

Finance Group; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: June 20, 2017

Abstract

Private firms often rely on insider lending, e.g. by banks. Insider lending is based on lending relationships that typically involve intertemporal loan pricing: losses from early years are recovered by information rents in later years, stemming from private information the inside lender has regarding the firm's creditworthiness. Our model shows that overly transparent financial reporting reduces the inside lender's information rent such that the lender has an insufficient incentive to offer early stage financing. Conservative reporting often is more effective to enable relationship lending than aggressive reporting. This paper thus offers a new rationale for why financial reporting by private firms is conservative and opaque. It also shows when accounting standards help firms to credibly commit to sufficiently conservative and opaque financial reporting.

Keywords: accounting conservatism, financial reporting opacity, private firms, insider lending, relationship lending

JEL Classification: G21, G32, M41

Suggested Citation

Bigus, Jochen and Hakenes, Hendrik, Insider Lending, Conservatism, and Accounting Standards (June 20, 2017). Available at SSRN: https://ssrn.com/abstract=2414587 or http://dx.doi.org/10.2139/ssrn.2414587

Jochen Bigus

Free University Berlin, Department Accounting and Finance ( email )

Van't-Hoff-Str. 8
Berlin, Berlin 14195
Germany
++49-30-83852509 (Phone)

Hendrik Hakenes (Contact Author)

Finance Group ( email )

Adenauerallee 24-42
D-53113 Bonn
Germany
+49-228-73-9225 (Phone)

HOME PAGE: http://www.finance.uni-bonn.de/hakenes

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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