Keeping Creditors Happy: Evidence from Borrowers' Financial Statement Comparability in the Aftermath of Bank Mergers
70 Pages Posted: 11 Nov 2020 Last revised: 14 Nov 2020
Date Written: November 5, 2020
This paper studies whether borrowing firms consider informational needs of various market participants and strategically adjust their financial reporting behavior. Using a large sample of borrowing firms from 1990 to 2018, we first posit and find that borrowing firms sharing the same bank as their primary lender have higher financial statement comparability. Moreover, using the setting of bank mergers, we investigate the borrowing firms’ strategic financial reporting behavior in response to an increase in banks’ demand for financial report information. We demonstrate that the financial statement comparability between borrowers of target and acquirer banks increases in the post bank merger event. Further, we find that the financial statement comparability between borrowers of a target bank and those of its industry peers, who are not affected by bank mergers decreases in the post bank merger period. The findings are consistent with our argument that, in response to bank mergers, the borrowing firms prioritize the demand from their new creditors over the demand from other market participants and make strategic disclosure decisions accordingly. We conduct additional tests to show that our results hold even after we consider target borrowers’ voluntary disclosure behavior, target borrower switching its lender in the post bank merger period, the location of the acquiring bank and the acquiring bank’s internal governance. Further, we conduct two pseudo tests to validate our results. Our study concludes that borrowers of a target bank strategically aim to favor the acquirer bank’s informational needs.
Keywords: financial statement comparability, lending relationship, borrowers, mergers, information, banks
JEL Classification: M41, G14, G21, G29, G34, D80
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