The effect of borrowers' accounting conservatism on lenders' loan loss provisions: Evidence from China's banking industry

Xinyue Zhang, Yuxiang Zhong and Wanli Li

International Review of Financial Analysis, 2022, vol. 82, issue C

Abstract: This paper investigates how borrowers' accounting conservatism affects lenders' loan loss provisions in the Chinese banking context. We predict that when borrowers' financial statements are more conservative, lenders receive borrowers' bad news in a timelier manner and set aside more loan loss provisions. The empirical results confirm that borrowers' accounting conservatism is positively associated with lenders' loan loss provisions, as the former affects the latter via its impact on loan classification, and this positive association is more pronounced when information asymmetry is higher. In heterogeneity tests, we find that this positive association is stronger for non-state-owned, listed, and less prudent lenders and also varies across debt contract characteristics. Collectively, the results of this study offer insights into how lenders accrue loan losses when borrowers' financial reporting is more conservative.

Keywords: Accounting conservatism; Information asymmetry; Information transfer; Loan loss provisions (search for similar items in EconPapers)
JEL-codes: G21 G32 M41 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:82:y:2022:i:c:s1057521922001752

DOI: 10.1016/j.irfa.2022.102214

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