Accounting Credibility and Liquidity Constraints: Evidence from Reactions of Small Banks to Monetary Tightening

51 Pages Posted: 12 Sep 2014

Date Written: September 10, 2014

Abstract

This study examines the relationship between accounting credibility and firms’ ability to fund their investments. Theory suggests that credible reporting resulting from external audits enables firms to attract external funds needed for their investments. The tests exploit monetary policy tightening that creates a liquidity shortage for banks, which in turn either requires banks to raise additional funds to restore liquidity or forces them to restrict their investments in the form of lending. Studying small non-public banks for which external audits are voluntary, I find that audited banks can better access funds during periods of monetary tightening than unaudited banks. As such, adverse liquidity shocks impede the lending of audited banks less. Overall, these findings present new evidence on how accounting credibility affects firms’ ability to invest.

Keywords: external audits, accounting credibility, external financing, investment, banks

JEL Classification: E50, G21, M41

Suggested Citation

Lo, Alvis K., Accounting Credibility and Liquidity Constraints: Evidence from Reactions of Small Banks to Monetary Tightening (September 10, 2014). Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2494567

Alvis K. Lo (Contact Author)

Boston College ( email )

Carroll School of Management, Fulton 542
140 Commonwealth Ave.
Chestnut Hill, MA 02467
United States
617-552-8674 (Phone)

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