Loan Sales and Accounting Conservatism

• In Event: Real effects of conservative reporting
  In Paper Session: Real Effects of Cnservative Reporting

Abstract

We examine whether the initial loan sale in the secondary loan market affects borrowing firms’ accounting conservatism. We find that firms exhibit a significant decline in accounting conservatism after the initial trading of their bank loans. We also document that firms with higher loan trading liquidity experience a larger decline in accounting conservatism after initial loan sales, whereas firms borrowing from reputable lenders and relationship lenders experience a smaller decline in accounting conservatism after initial loan sales. Furthermore, firms without future debt financing pressure experience a steeper decline in conservatism. Collectively, we provide corroborative evidence that loan sales dilute lenders’ monitoring incentive, which in turn lowers lenders’ demand for conservative reporting.

Authors

• Saiying Deng, Southern Illinois University

• Yutao Li, University of Lethbridge

• Gerald Lobo, University of Houston

• Pei Shao, University of Lethbridge