Bank Accounting Conservatism and Bank Lending Behaviour

• Main Authors: LIM, Chu Yeong, Walker, Martin, LEE, Edward, Kausar, Asad
• Format: text
• Language: English
• Published: Institutional Knowledge at Singapore Management University 2012
• Subjects: Accounting; Finance and Financial Management
• Online Access: https://ink.library.smu.edu.sg/soa_research/906
• Institution: Singapore Management University

Literature documents a negative relation between borrower accounting conservatism and debt pricing but the relation between bank accounting conservatism and bank lending behaviour is an area that has been little studied. We provide evidence that banks which recognize losses on a timely basis charge borrowers higher spreads in response to their loan losses. However, these accounting conservative banks become less sensitive to loan losses in their debt pricing when the economic environment deteriorates. The results hold after controlling for borrower conservatism, corporate governance, bank risk and other borrower, deal and bank characteristics. Moreover, the accounting conservative banks are more likely to select accounting conservative borrowers with that likelihood showing a smaller increase relative to the less conservative banks when the economic environment worsens. The results are consistent with accounting conservative banks exhibiting more prudent and stable lending behaviour in debt pricing and borrower selection.