Banking Practices and Borrowing Firms’ Financial Reporting Quality: Evidence from Bank Cross-Selling
Review of Accounting Studies, Forthcoming
54 Pages Posted: 10 May 2021 Last revised: 10 Nov 2021
Date Written: August 16, 2021
This paper studies whether banking practices affect borrowing firms’ financial reporting quality. Specifically, I examine the effect of bank cross-selling activities (i.e., a bank’s joint provisions of lending and underwriting services to the same firm) on borrowers’ financial reporting quality for debt contracting purposes. Compared to issuing stand-alone loans, cross-selling increases a bank’s risk exposure to the firm and therefore gives the bank more motivation to monitor the borrower’s financial condition (incentive effect). In addition, cross-selling enables information sharing between the underwriting and lending divisions and allows the bank to have a closer understanding of the borrower’s underlying economics, thereby better disciplining the borrower’s ability to withhold bad news (information effect). Consistent with these arguments, I expect and find that cross-selling is associated with an improvement in the debt contracting value (DCV) of accounting information at borrowing firms. I also provide evidence in support of the incentive effect and the information effect.
Keywords: Banks, financial reporting quality, debt contracting
JEL Classification: G21, M41
Suggested Citation: Suggested Citation