Are Lender Networks Associated with Borrower Financial Reporting Quality?

• In Event: Reporting and Disclosure Considerations

Abstract

Relying upon network and agency theories, we investigate the association between lender networks and their borrower’s financial statement quality. Specifically, we operationalize a novel network of lenders based on the number of common borrowers. Borrowers that have lending relationships with well-connected lenders are likely to be better monitored by their lenders and have lower information asymmetry. Thus, we expect and find that borrower’s financial reporting quality (FRQ) is positively associated with more extensive lender networks. Our findings imply that additional monitoring provided by more extensive lending networks motivate borrowers to have higher FRQ. The study has both academic and practical contributions. First, it adds to banking and networking literature by suggesting new lender network measures. The study also empirically assesses the relationship between lender networks and their borrower’s FRQ. Additionally, our study informs lenders searching for ways to reduce information costs.

Authors

• Mark Kohlbeck, Florida Atlantic University

• Jiwon Nam, Florida Atlantic University