Bank Competition and Borrower Conservatism

Abstract

We study the influence of bank competition on U.S. public borrowers’ accounting conservatism by exploiting the staggered adoption of the Riegle-Neal Interstate Banking and Branching Efficiency Act (IBBEA) of 1994, which increased the threat of new bank entrants. We find that borrowers’ conditional conservatism fell after IBBEA adoption, suggesting that IBBEA reduced banks’ bargaining power and their ability to demand conservatism. Conservatism fell more for firms located in states with weak incumbent banks, relying more on bank loans, and having fewer large shareholders and analysts to monitor them. Finally, we find that loans included fewer covenants after IBBEA.

Keywords: bank competition, threat of new entrants, Interstate Banking and Branching Efficiency Act (IBBEA), conditional conservatism, loan contracting, loan covenant

JEL Classification: G21, G28, M41, K23