Financial Statement Complexity and Bank Lending

53 Pages Posted: 17 Jul 2018 Last revised: 2 Nov 2018

See all articles by Indraneel Chakraborty

Indraneel Chakraborty

University of Miami

Andrew J. Leone

University of Miami

Miguel Minutti-Meza

University of Miami - Department of Accounting

Matthew Phillips

University of Miami Business School; University of Miami

Date Written: October 22, 2018

Abstract

Recent studies and anecdotal evidence suggest that investors struggle to process complex financial reports. Existing theory and evidence demonstrate that banks not only have unique advantages in acquiring information, relative to equity and public debt investors, but also can impose contractual terms to mitigate information frictions. We investigate whether financial statement complexity is associated with firms' reliance on bank financing and with the terms of bank loans (i.e., the amount and rate of the loan, along with covenants and collateral). We focus on two dimensions of complexity that capture the volume and presentation of financial information: 10-K length and readability. We find that complexity is positively associated both with firms' reliance on bank financing and with banks increasing their level of screening, rationing their credit supply, and imposing tighter covenants. Our results suggest that banks continue to play their role as informed capital providers in a changing economy, characterized by growing financial statement complexity and innovations in banks' business models.

Keywords: complexity, financial statements, 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 (October 22, 2018). 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

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

University of Miami ( email )

Coral Gables, FL 33124
United States

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