The Effect of Information Opacity and Accounting Irregularities on Personal Lending Relationships: Evidence From Lender and Manager Co-migration
79 Pages Posted: 8 Dec 2015 Last revised: 5 Oct 2018
Date Written: June 4, 2018
We examine how personal lending relationships between lenders and managers are affected by information and accounting environments of borrowing firms. We address this question by exploring whether, following managerial turnover, lenders migrate with the manager from the firm where a relationship developed (origin firm) to the manager’s new firm (destination firm). We find that the opacity of the external information environment of the destination firm significantly increases the probability of lenders’ co-migration, while accounting irregularities at both the destination and origin firms decrease it. We also show that co-migration is affected by a lender’s characteristics, such as monitoring efficiency, industry concentration of the loan portfolio and loan growth. We further find that the relation between co-migration and a lender’s monitoring efficiency depends on the information and accounting environments of the origin and destination firms. A lender’s monitoring efficiency increases its co-migration probability when a manager moves to an opaque firm but not when she moves to a transparent one. When the destination or origin firm experiences accounting irregularities, even lenders with strong monitoring capabilities are mostly reluctant to continue their relationship with a migrating manager.
Keywords: Bank lending, lender-manager relationship, debt contracting, information environment, accounting irregularity
JEL Classification: D81, D82, G20, G21, G32, M41
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