Financial Statement Complexity and Bank Lending
51 Pages Posted: 17 Jul 2018 Last revised: 19 Jul 2019
Date Written: July 18, 2019
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 with the terms of bank loans. We focus on two dimensions of complexity that capture the volume and presentation of information: 10-K length and readability. First, we document that complexity is positively associated with firms’ reliance on bank financing. This result is consistent with banks’ superior information processing capabilities. Second, we find that banks ameliorate information frictions using contractual terms (i.e., interest rates, size, covenants, and collateral requirements). Overall, our combined 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
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