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Loan relation with foreign banks and information asymmetry: evidence from earnings management by local firms in Korea

Author

Listed:
  • Sangwook Lee

    (Seoul National University of Science and Technology)

  • Sang Hoo Bae

    (Clark University)

  • Inshik Seol

    (Clark University)

Abstract

Previous research shows that foreign (domestic) banks rely more on ‘hard’ (‘soft’) information in their lending decisions and such approaches may give a motivation for the local firms to improve their credit scores by, for example, overstating earnings. The paper develops a theoretical model and empirically tests the model using actual data from Korea. The model predicts that local firms tend to overstate earnings when they increase the loan relations with foreign banks and the proportion of local firms with earnings management increases as the recoverability of foreign banks decreases (increases) in the higher (lower) level of recoverability. The results of the empirical test are consistent with the predictions by the model. We also discuss the implications of the study and an extension for the future study.

Suggested Citation

  • Sangwook Lee & Sang Hoo Bae & Inshik Seol, 2019. "Loan relation with foreign banks and information asymmetry: evidence from earnings management by local firms in Korea," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 43(2), pages 344-366, April.
    • Handle: RePEc:spr:jecfin:v:43:y:2019:i:2:d:10.1007_s12197-018-9465-7
    DOI: 10.1007/s12197-018-9465-7
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    More about this item

    Keywords

    Information asymmetry; Earnings management; Firm-bank relations; Bank loans;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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