The Effect of Aggregating Accounting Reports on the Quality of the Lending Decision: An Empirical Investigation

Abstract

This paper reports on an empirical study concerning the stipulation that detailed financial information is more useful for lending decision making. Prior research and other evidence assert that the utility of more detailed data is greater than the utility of (condensed) aggregated data. Since the utility of using data cannot be evaluated in a direct manner, decision effects have been used as a surrogate measure. The primary result of this research shows that the perceived risk of the borrowing firm tends to be negatively influenced by the aggregation of financial reports only when the financial situation of that firm is marginal. This result, then, supports imputing a higher utility for detailed data, but only under certain conditions. A secondary result casts doubts on the strength of the predictive ability of financial ratios if not accompanied by financial information more detailed than that used in computing these ratios.

Keywords: aggregation, information loss, loan officers, cost of debt, income statement

JEL Classification: G15; M40; M41; D80