Bank Competition and Borrower Conservatism

53 Pages Posted: 12 Dec 2019

See all articles by Liya Hou

Liya Hou

St. Cloud State University - Department of Accounting

Yi Liang

Temple University - Department of Accounting

Sudipta Basu

Temple University - Department of Accounting

Date Written: November 20, 2019

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

Suggested Citation

Hou, Liya and Liang, Yi and Basu, Sudipta, Bank Competition and Borrower Conservatism (November 20, 2019). Available at SSRN: https://ssrn.com/abstract=3492613 or http://dx.doi.org/10.2139/ssrn.3492613

Liya Hou

St. Cloud State University - Department of Accounting ( email )

720 4th Ave S.
St Cloud, MN 56301
United States

Yi Liang (Contact Author)

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States

Sudipta Basu

Temple University - Department of Accounting ( email )

Philadelphia, PA 19122
United States
215.204.0489 (Phone)
215.204.5587 (Fax)

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