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Accounting information and risk shifting with asymmetrically informed creditors

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  • Baldenius, Tim
  • Deng, Mingcherng
  • Li, Jing

Abstract

This paper explores the effects of public information such as accounting earnings in a competitive lending setting with risk shifting. Debt financing creates incentives for borrowers to take on excessive risks, in particular in bad states of the world. If a privately informed inside creditor bids against outside creditors to extend a loan, public information levels the playing field, which affects the bidding and risk shifting. Nonetheless, a perfect public signal would yield the least efficient outcome: introducing some measurement noise alleviates risk shifting by subjecting outside creditors to the winner’s curse, allowing borrowers in bad states cheaper access to loans. However, for pessimistic priors about the borrower, greater public signal precision can alleviate risk shifting, at the margin. We discuss implications for financial reporting regulations along the business cycle and for creditor turnover.

Suggested Citation

  • Baldenius, Tim & Deng, Mingcherng & Li, Jing, 2024. "Accounting information and risk shifting with asymmetrically informed creditors," Journal of Accounting and Economics, Elsevier, vol. 77(2).
    • Handle: RePEc:eee:jaecon:v:77:y:2024:i:2:s0165410123000915
    DOI: 10.1016/j.jacceco.2023.101667
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    More about this item

    Keywords

    Asset substitution; Risk shifting; Creditor turnover; Relationship lending; Accounting information;
    All these keywords.

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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