You Owe Me, But I Own You: Borrowers’ Reporting Conservatism When Lenders are Shareholders

• In Event: Doctoral Road Papers

Abstract

I argue that dual holders, i.e., financial institutions that simultaneously hold both debt and equity claims of the same firm will demand less conservative financial reporting because dual holders reduce shareholder-debtholder conflicts. Consistent with this prediction, I find that firms with dual holders report less conservatively than other firms with outstanding debt . My results are robust to using multiple alternative measures of accounting conservatism. Further, as expected, the reduction in conservatism is more pronounced when the shareholder-debtholder agency conflict is high, i.e., when borrowers are closer to default or when borrowers’ real assets are less redeployable. I address endogeneity concerns using a propensity score matching technique, an instrumental variables approach, and a largely exogenous shock to the existence of a dual holder that resulted from the merger of Bank of America with Merrill Lynch. Overall, my findings provide novel evidence that dual holders impact a firm’s accounting choices.

Author

• Rui-Zhong Zhang, Tulane University