The Effect of Bank Monitoring on the Demand for Earnings Quality in Bond Contracts

Akinobu Shuto, Norio Kitagawa and Naoki Futaesaku
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Akinobu Shuto: Associate Professor, Graduate School of Economics, The University of Tokyo (E-mail: shuto@e.u-tokyo.ac.jp)
Norio Kitagawa: Associate Professor, Graduate School of Business Administration, Kobe University (E-mail: kitagawa@b.kobe-u.ac.jp)
Naoki Futaesaku: Director, Institute for Monetary and Economic Studies, Bank of Japan (E-mail: naoki.futaesaku@boj.or.jp)

No 17-E-12, IMES Discussion Paper Series from Institute for Monetary and Economic Studies, Bank of Japan

Abstract: We investigate whether bank monitoring that relies on private information in private debt decreases the demand for earnings quality in public debt. In doing so, we focus on Japanese main banks that have high abilities to access the private information of borrowing firms. We find that under stable financial conditions in the bond-issuing firms, accruals quality is negatively associated with bond yield spreads, regardless of the existence of a main bank, suggesting that reporting higher quality earnings affects the reduction of the cost of debt in public debt. In contrast, we find that when the bond-issuing firms with a main bank have high default risk, there is no relationship between accruals quality and bond yield spread. The results suggest that when a main bank has a stronger incentive to monitor their borrowing firms due to the firm's poor financial performance, the increased bank monitoring using private information decreases the demand for earnings quality in bond contracts.

Keywords: Accruals Quality; Bond Yield Spread; Main Bank; Private Information; Japan (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Date: 2017-12
New Economics Papers: this item is included in nep-ban and nep-cta
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Citations: View citations in EconPapers (1)

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