The Effect of Borrowers' Financial Statements on Bank Financial Reporting

• In Event: Forum on Corporate Reporting

Abstract

The accounting literature finds that bank characteristics, organizational features and the regulatory environment impact bank financial reporting. This study investigates how the borrowers' financial statements affect the timeliness of bank loan loss provisions (TLLP). I hypothesize that banks increase their reliance on accounting (arms-length) information over soft (relationship) information for borrowers with higher quality financial statements. Matching corporate borrowers to their bank lenders in India, I find that banks that lend to borrowers with higher quality financial statements have higher TLLP. As banks endogenously select into arms length or relationship lending, I exploit an exogenous shock that led a subset of banks to shift towards greater arms length lending to find that the treated banks increased TLLP. Furthermore, I find no evidence that soft information affects loan loss provisioning. The results in this study are consistent with higher quality financial statements substituting for bank information production.

Author

• Siddharth Bhambhwani, University of Miami