Financial Statement Quality and Debt Contracting: Evidence from a Survey of Commercial Lenders

62 Pages Posted: 2 Sep 2014 Last revised: 1 Jul 2016

See all articles by Dain C. Donelson

Dain C. Donelson

University of Iowa

Ross Jennings

University of Texas at Austin - Department of Accounting

John M. McInnis

University of Texas at Austin - Department of Accounting

Date Written: June 1, 2016

Abstract

We survey commercial bank lenders to better understand how they evaluate and react to variation in financial statement quality and how they view recent changes in accounting standards. A unique aspect of this study is that our respondents focus on medium-size loans to private companies. In fact, more than 90 percent of the survey respondents primarily make credit decisions on loans between $250 thousand and $50 million. This is in contrast to prior archival research, which focuses primarily on very large loans to public firms or very small loans to private firms. We find that lenders in our sample distinguish among financial statements in terms of quality, including conservatism, primarily on the basis of accrual patterns and restatements. While this general result holds throughout our sample, financial statement quality is substantially more important for lenders making larger loans (over $10 million) as compared to very small loans (under $1 million). In addition, bank lenders are much more likely to respond to low quality reporting with collateral and guarantee requirements than with an increase in the interest rate charged. This finding is consistent for lenders making both larger and smaller loans. Finally, despite concerns in the academic literature, bank lenders in our sample actually hold a neutral-to-positive view of recent changes in accounting standards. In addition, most do not support current efforts to exempt private companies from some accounting standards.

Keywords: Bank Lending; Debt Contracting; Financial Statement Quality; Conservatism

JEL Classification: M41

Suggested Citation

Donelson, Dain C. and Jennings, Ross and McInnis, John M., Financial Statement Quality and Debt Contracting: Evidence from a Survey of Commercial Lenders (June 1, 2016). Available at SSRN: https://ssrn.com/abstract=2490237 or http://dx.doi.org/10.2139/ssrn.2490237

Dain C. Donelson (Contact Author)

University of Iowa ( email )

108 Pappajohn Business Building
Iowa City, 52242-1000
United States

Ross Jennings

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-471-5340 (Phone)
512-471-3904 (Fax)

John M. McInnis

University of Texas at Austin - Department of Accounting ( email )

Austin, TX 78712
United States
512-232-6791 (Phone)

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