Bank Lending Standards and Borrower Accounting Conservatism

59 Pages Posted: 19 Sep 2017 Last revised: 13 Mar 2018

See all articles by Urooj Khan

Urooj Khan

Columbia Business School - Accounting, Business Law & Taxation

Alvis K. Lo

Boston College

Date Written: March 9, 2018

Abstract

Bank lending standards vary over time. Periods in which firms find it relatively easy to borrow are followed by periods in which banks scrutinize borrowers more and tighten lending. We predict that changes in lending standards affect the accounting conservatism of bank-dependent firms. Using (i) a natural experiment that leads to certain banks tightening lending standards for plausibly exogenous reasons, and (ii) time series variation in economy-wide bank lending standards, we find that borrowers increase their asymmetric timely loss recognition in response to the tightening of lending standards. Further, riskier borrowers, borrowers less likely to violate loan covenants, and borrowers whose banks tighten lending standards to a greater extent, display larger increases in conservatism following the tightening of lending standards. These results suggest that borrowers internalize the costs and benefits of increasing conservatism. Finally, borrowers do not seem to decrease conservatism immediately after the lending standards are loosened. Overall, our results illuminate a commonly observed banking phenomenon that can influence firms’ incentives to recognize losses, suggesting that developments in the banking sector can shape the information produced by firms in the real sector.

Keywords: Bank Lending Standards, Conservatism, Debt Contracting, Bank Monitoring, Financial Crises

JEL Classification: D81, D82, G01, G20, G21, M41

Suggested Citation

Khan, Urooj and Lo, Alvis K., Bank Lending Standards and Borrower Accounting Conservatism (March 9, 2018). Columbia Business School Research Paper No. 17-95. Available at SSRN: https://ssrn.com/abstract=3037739 or http://dx.doi.org/10.2139/ssrn.3037739

Urooj Khan (Contact Author)

Columbia Business School - Accounting, Business Law & Taxation ( email )

3022 Broadway
New York, NY 10027
United States

Alvis K. Lo

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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