Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans
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Sutherland_Financial statements.pdf
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Author(s)
Minnis, Michael
Sutherland, Andrew Gordon
Date Issued
July 2016
Journal
Journal of Accounting Research
Publisher
Wiley Blackwell
Citation
Minnis, Michael and Sutherland, Andrew. “Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans.” Journal of Accounting Research 55, no. 1 (August 2016): 197–233 © 2016 University of Chicago on behalf of the Accounting Research Center
Version
Author's final manuscript
Abstract
Using a data set that records banks’ ongoing requests of information from small commercial borrowers, we examine when banks use financial statements to monitor borrowers after loan origination. We find that banks request financial statements for half the loans and this variation is related to borrower credit risk, relationship length, collateral, and the provision of business tax returns, but in complex ways. The relation between borrower risk and financial statement requests has an inverted U-shape; and tax returns can be both substitutes and complements to financial statements, conditional on borrower characteristics and the degree of bank–borrower information asymmetry. Frequent financial reporting is used to monitor collateral, but only for non–real estate loans and only when the collateral is easily accessible to lenders. Collectively, our results provide novel evidence of a fundamental information demand for financial reporting in monitoring small commercial borrowers and a specific channel through which banks fulfill their role as delegated monitors.
MIT Department
Sloan School of Management
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Creative Commons Attribution-Noncommercial-Share Alike
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DOI of Published Version
https://doi.org/10.1111/1475-679x.12127
