Bank Relationships and Private Firms’ Financial Reporting Opacity

European Accounting Review, Forthcoming

47 Pages Posted: 12 Jul 2015 Last revised: 12 Mar 2016

See all articles by Christa Hillebrand

Christa Hillebrand

Free University of Berlin (FUB)

Jochen Bigus

Free University Berlin, Department Accounting and Finance

Date Written: May 1, 2015

Abstract

Private firms with relatively high costs of disclosure may benefit from a close relationship with a bank. Relationship lending is based on intertemporal contracting and requires the bank to acquire private information about the firm and, moreover, to keep this information private. For both reasons, we expect and find that private firms with fewer bank relationships exhibit higher levels of financial reporting opacity. Controlling for many other factors, firms with a single bank relationship exhibit more earnings management exceeding the median value of the three-year sum of absolute discretionary accruals by about 20%. They also disclose their financial reports about 14 days later and are considerably more likely to miss the mandatory filing date. The length of such firms’ financial reports is also smaller, containing approximately 7.4% fewer characters than the median report. The results are robust to different econometric specifications including endogeneity concerns. They indicate that private firms choose to be opaque in the presence of relationship lending.

Keywords: bank relationships, private firms, financial reporting opacity

JEL Classification: G21, G32, M41

Suggested Citation

Hillebrand, Christa and Bigus, Jochen, Bank Relationships and Private Firms’ Financial Reporting Opacity (May 1, 2015). European Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2629206 or http://dx.doi.org/10.2139/ssrn.2629206

Christa Hillebrand

Free University of Berlin (FUB) ( email )

Van't-Hoff-Str. 8
Berlin, Berlin 14195
Germany

Jochen Bigus (Contact Author)

Free University Berlin, Department Accounting and Finance ( email )

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

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