The Effects of Borrowers’ Accounting Conservatism on Lenders’ Loan Loss Provisions: Evidence from China Banking Industry

Posted: 18 Jun 2020

See all articles by Zhong Yuxiang

Zhong Yuxiang

Huazhong University of Science and Technology (HUST) - School of Management

Date Written: April 14, 2020

Abstract

In this paper, I investigate how borrowers’ accounting conservatism affects lenders’ loan loss provisions in Chinese setting. I predict that when borrowers’ financial statements are more conservative, lenders receive borrowers’ bad news in a more timely manner, which in turn induces more loan loss provisions. Empirical results confirm that lenders account more loan loss provisions when borrowers’ accounting conservatism is higher (I refer to this effect as information transfer effects). Additional tests find that the information transfer effects are stronger when borrowers experience negative shocks and lenders are more likely to shift normal loans to non-performances loans when borrowers’ accounting conservatism is higher. Furthermore, cross-sectional tests show that the information transfer effects are stronger if borrowers have higher default risk, information asymmetry, and agency conflicts, if loans are unsecured, without collateral, and short-term, if lenders are not state-owned, listed firms, and with lower reputation.

Keywords: Accounting conservatism; loan loss provisions; micro characteristics, information transfer

JEL Classification: M41 G21

Suggested Citation

Yuxiang, Zhong, The Effects of Borrowers’ Accounting Conservatism on Lenders’ Loan Loss Provisions: Evidence from China Banking Industry (April 14, 2020). Available at SSRN: https://ssrn.com/abstract=3575325

Zhong Yuxiang (Contact Author)

Huazhong University of Science and Technology (HUST) - School of Management ( email )

School of Management
HUAZHONG UNIVERSITY OF SCIENCE AND TECHNOLOGY
Wuhan, Hubei 430074
China
430074 (Fax)

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
95
PlumX Metrics