Banking practices and borrowing firms’ financial reporting quality: evidence from bank cross-selling

Barbara Su ()
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Barbara Su: Temple University

Review of Accounting Studies, 2023, vol. 28, issue 1, No 6, 236 pages

Abstract: Abstract This paper studies whether banking practices affect borrowing firms’ financial reporting quality. Specifically, I examine the effect of bank cross-selling activities (i.e., a bank’s joint provisions of lending and underwriting services to the same firm) on borrowers’ financial reporting quality for debt contracting purposes. Compared to issuing stand-alone loans, cross-selling increases a bank’s risk exposure to the firm and therefore gives the bank more motivation to monitor the borrower’s financial condition (incentive effect). In addition, cross-selling enables information sharing between the underwriting and lending divisions and allows the bank to have a closer understanding of the borrower’s underlying economics, which disciplines the borrower’s ability to withhold bad news (information effect). Consistent with these arguments, I expect and find that cross-selling is associated with an improvement in the debt contracting value (DCV) of accounting information at borrowing firms. I also provide evidence in support of the incentive effect and the information effect.

Keywords: Banks; Financial reporting quality; Debt contracting; Universal banking; G14; M41 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11142-021-09640-6

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