Learning Through Failure: The Effect of Banks’ Recent Default Experience on Borrowers’ Timely Loss Recognition
53 Pages Posted: 4 Apr 2016 Last revised: 13 Apr 2018
Date Written: April 2018
This study examines the effects of lenders’ recent default experience on borrowers’ timely loss recognition. We exploit a unique empirical setting that examines defaults occurring in lenders’ loan portfolios that are unrelated to the firms of interest. We find that borrowers increase timely loss recognition following lenders’ default experiences. Our results vary predictably based on the costs and benefits associated with lenders changing their monitoring behavior. We verify that increases in timely loss recognition connected to lenders’ recent default experiences facilitate greater creditor control, by tightening covenants and increasing the likelihood of violations. Overall, our study suggests that lender default experiences are informative events that have spillover effects for firms’ financial reporting choices.
Keywords: Syndicated Loans, Timely Loss Recognition, Bank Monitoring, Loan Contracts, Covenants
JEL Classification: G20, G21, G30, G32, M41
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