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Bank Relationships and Private Firms’ Financial Reporting Quality

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  • Jochen Bigus
  • Christa Hillebrand

Abstract

Private firms with relatively high (proprietary) costs of disclosure may benefit from a close relationship with a bank. Relationship lending is based on intertemporal contracting that assumes that the bank is able to acquire private information about the firm and, moreover, to keep this information private. For both reasons, we expect and find that private firms with fewer bank relationships exhibit lower levels of financial reporting quality. Controlling for many other factors, firms with a single bank relationship disclose their financial reports about 14 days later. The size of such firms’ financial reports is also smaller, containing approximately 8% fewer words than the median report. Firms with a single bank relationship also exhibit more earnings management, exceeding the median value of the three-year sum of absolute discretionary accruals by about 20%. The results are robust to different econometric specifications, including endogeneity concerns. They indicate that private firms choose to be opaque in the presence of fewer lending relationships.

Suggested Citation

  • Jochen Bigus & Christa Hillebrand, 2017. "Bank Relationships and Private Firms’ Financial Reporting Quality," European Accounting Review, Taylor & Francis Journals, vol. 26(2), pages 379-409, April.
    • Handle: RePEc:taf:euract:v:26:y:2017:i:2:p:379-409
    DOI: 10.1080/09638180.2016.1152906
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    Cited by:

    1. Florian Kiy & Theresa Zick, 2020. "Effects of declining bank health on borrowers’ earnings quality: evidence from the European sovereign debt crisis," Journal of Business Economics, Springer, vol. 90(4), pages 615-673, May.
    2. Habib, A. & Ranasinghe, D. & Huang, H.J., 2018. "A literature survey of financial reporting in private firms," Research in Accounting Regulation, Elsevier, vol. 30(1), pages 31-37.
    3. Martin Glaum, 2020. "Financial Reporting in Non-listed Family Firms: Insights from Interviews with CFOs," Schmalenbach Business Review, Springer;Schmalenbach-Gesellschaft, vol. 72(2), pages 225-270, April.
    4. Inna Sousa Paiva, 2018. "Contracting debt and the quality of financial reporting in private firms," Contaduría y Administración, Accounting and Management, vol. 63(2), pages 33-34, Junio.
    5. Riccardo Palumbo & Pierangelo Rosati, 2022. "Exploring the Relationship between New Bank Debt and Earnings Management: Evidence from Italian SMEs," Economies, MDPI, vol. 10(6), pages 1-17, May.
    6. Chen Chen & Michelle Song & Cameron Truong & Jin Zhang, 2024. "Naming as business strategy: an analysis of eponymy and debt contracting," Review of Accounting Studies, Springer, vol. 29(3), pages 2971-3017, September.

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