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

See all articles by Barbara Su

Barbara Su

Temple University - Fox School of Business and Management

Date Written: August 16, 2021

Abstract

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

Su, Barbara, Banking Practices and Borrowing Firms’ Financial Reporting Quality: Evidence from Bank Cross-Selling (August 16, 2021). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3840958 or http://dx.doi.org/10.2139/ssrn.3840958

Barbara Su (Contact Author)

Temple University - Fox School of Business and Management ( email )

Philadelphia, PA 19122
United States

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