The Role of Financial Reporting Quality in Worldwide Access to Credit
56 Pages Posted: 13 Dec 2018
Date Written: November 28, 2018
Firms with less access to credit experience a host of growth-constraining issues. Prior research provides evidence that a country’s financial systems affect the ability of businesses to access credit financing. Information asymmetry between lender and firm also exacerbates credit constraint. However, high quality financial reporting may reduce information asymmetries, increase the credibility of the loan applicant, and result in greater access to credit even in low financial governance environments. We document that firms with audited financial statements have lower odds of reporting denial of credit on their most recent credit application than firms without audited financial statements. We further document that the importance of audited financial statements in reducing information asymmetry and increasing access to credit is greatest in developing economies. This finding suggests that one way in which firms in developing economies can increase their odds of gaining access to credit may be engaging an external auditor to prepare audited financial statements.
Keywords: financial reporting quality, audit, credit lending, emerging markets, financing constraints, entrepreneurship, SME, WBES
JEL Classification: G15, G21, G32, G34, H8, H25, L26, M16, M21, M42
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