Does Creditor Monitoring Affect Financial Reporting? Evidence from a Natural Experiment in India

• In Event: Reporting Issues

Abstract

Using a landmark securities reform that increased secured-creditor contractual rights in India and a novel dataset on bank lending to private firms, I investigate whether a shift in the contract enforcement regime impacted financial reporting quality. I hypothesize that firms with greater secured debt would experience increased levels of creditor monitoring during loss years due to the ease of contract enforcement (collateral seizure) after the reform. Using a differences-in-differences design, I find that firms with high secured debt and losses made significant improvements to their financial reporting quality and made more conservative accounting choices post-reform. This effect is especially stronger for firms with relationship banking and is robust to survivor bias and other placebo checks. Overall, I provide strong evidence that increased monitoring by creditors can induce better financial reporting quality.

Author

• Siddharth Bhambhwani, University of Miami