Financial Statement Complexity and Bank Lending

47 Pages Posted: 17 Jul 2018 Last revised: 31 Dec 2020

See all articles by Indraneel Chakraborty

Indraneel Chakraborty

University of Miami

Andrew J. Leone

Northwestern University; University of Miami

Miguel Minutti-Meza

University of Miami - Department of Accounting

Matthew Phillips

University of Miami Business School

Date Written: December 31, 2020

Abstract

Recent evidence suggests that investors struggle to process complex financial disclosures. Relative to equity and public debt investors, banks have unique advantages in acquiring information and can impose contractual terms to mitigate information frictions. We investigate whether financial statement complexity is associated with firms' reliance on bank financing and the terms of bank loans. We focus on two aspects of complexity, the length of financial reports and the complexity of financial reporting rules. We document that complexity is positively associated with firms' reliance on bank financing (i.e., level of debt and new financing). This result is consistent with banks' superior information processing capabilities. Next, we document that banks ameliorate information frictions using loan contractual terms (i.e., interest rates, covenants, and collateral requirements). Overall, our findings suggest that banks are an attractive source of financing for firms with complex disclosures, but banks also increase screening and monitoring for relatively complex borrowers.

Keywords: financial statement complexity, bank lending, debt contracting

JEL Classification: M41, G14, G21, G32, D82

Suggested Citation

Chakraborty, Indraneel and Leone, Andrew J. and Minutti-Meza, Miguel and Phillips, Matthew, Financial Statement Complexity and Bank Lending (December 31, 2020). 29th Annual Conference on Financial Economics & Accounting 2018, Available at SSRN: https://ssrn.com/abstract=3214576 or http://dx.doi.org/10.2139/ssrn.3214576

Indraneel Chakraborty (Contact Author)

University of Miami ( email )

P.O. Box 248094
Coral Gables, FL 33124-6552
United States
312-208-1283 (Phone)

HOME PAGE: http://sites.google.com/site/chakraborty/

Andrew J. Leone

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

University of Miami ( email )

School of Business
Coral Gables, FL 33146
United States
305-284-3101 (Phone)

HOME PAGE: http://sbaleone.bus.miami.edu

Miguel Minutti-Meza

University of Miami - Department of Accounting ( email )

Coral Gables, FL 33146-6531
United States
305-284-6287 (Phone)

Matthew Phillips

University of Miami Business School ( email )

Coral Gables, FL 33146-6531
United States

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