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Economic Growth and Financial Statement Verification

77 Pages Posted: 30 Sep 2014 Last revised: 2 Sep 2016

Petro Lisowsky

University of Illinois at Urbana-Champaign - Department of Accountancy; Norwegian Center for Taxation

Michael Minnis

University of Chicago - Booth School of Business

Andrew Sutherland

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: August 1, 2016

Abstract

We use a proprietary dataset of financial statements collected by banks to examine whether economic growth is related to the use of financial statement verification in debt financing. Exploiting the distinct economic growth and contraction patterns of the construction industry over the years 2002 to 2011, our estimates reveal that banks reduced their collection of unqualified audited financial statements from construction firms at nearly twice the rate of firms in other industries during the housing boom period before 2008. This reduction was most severe in the regions that experienced the most significant construction growth. These trends reversed during the sub-sequent housing crisis in 2008 to 2011 when construction activity contracted. Moreover, using bank- and firm-level data we find a strong negative (positive) relation between audited financial statements during the growth period and subsequent loan losses (construction firm survival) during the contraction period. Collectively, our results reveal that macroeconomic fluctuations pro-duce temporal shifts in the overall level of financial statement verification and that temporal shifts in verification are related to bank loan portfolio quality and borrower performance.

Keywords: economic growth, commercial lending, banks, financial crisis, audit, verification, financial statements, lending standards

JEL Classification: D82, E32, E44, G21, M40

Suggested Citation

Lisowsky, Petro and Minnis, Michael and Sutherland, Andrew, Economic Growth and Financial Statement Verification (August 1, 2016). Chicago Booth Research Paper No. 14-30. Available at SSRN: https://ssrn.com/abstract=2502889 or http://dx.doi.org/10.2139/ssrn.2502889

Petro Lisowsky

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

Norwegian Center for Taxation ( email )

Helleveien 30
Bergen, Bergen 5045
Norway

Michael Minnis (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

Andrew Sutherland

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street

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