153rd Seminar

Topic:Lending Relationships and the Demand for AccountingConservatism:  Theory and Evidence


Presenter:Jing Li, associate professor, The University of Hong Kong   

                

Time:March 31, 2017(Friday) 1000 - 11:30


Venue:Room 205, Jiageng Bld 2


Abstract:We examine the role of lending relationships as a determinant of  accounting conservatism for borrowers with accounting-based covenants. We  incorporate the lender's information acquisition in the incomplete contract  framework. The lender with more intense relationship is more likely to obtain  private information about the project's true states and make efficient  liquidation decisions after covenant violations. We show that the lending  relationship intensity and accounting conservatism have complementary effects on  the lender's information acquisition incentive, as well as on the borrower's  total payoff. We derive and test two predictions from the model: 1) accounting  conservatism increases with the intensity of lending relationship, and 2) the  relationship between the ex-ante loan spread  and accounting conservatism is more negative as the intensity of lending  relationship increases. Our empirical evidence is consistent with both of these  predictions.