Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans
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 borrow...
| Main Authors: | , |
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| Other Authors: | |
| Format: | Article |
| Language: | en_US |
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Wiley Blackwell
2017
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| Online Access: | http://hdl.handle.net/1721.1/109261 https://orcid.org/0000-0003-2517-1685 |
| _version_ | 1826192638855872512 |
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| author | Minnis, Michael Sutherland, Andrew Gordon |
| author2 | Sloan School of Management |
| author_facet | Sloan School of Management Minnis, Michael Sutherland, Andrew Gordon |
| author_sort | Minnis, Michael |
| collection | MIT |
| description | 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. |
| first_indexed | 2024-09-23T09:25:30Z |
| format | Article |
| id | mit-1721.1/109261 |
| institution | Massachusetts Institute of Technology |
| language | en_US |
| last_indexed | 2024-09-23T09:25:30Z |
| publishDate | 2017 |
| publisher | Wiley Blackwell |
| record_format | dspace |
| spelling | mit-1721.1/1092612022-09-30T14:26:11Z Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans Minnis, Michael Sutherland, Andrew Gordon Sloan School of Management Sutherland, Andrew Gordon 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. 2017-05-22T18:04:48Z 2017-05-22T18:04:48Z 2016-07 2016-01 Article http://purl.org/eprint/type/JournalArticle 0021-8456 1475-679X http://hdl.handle.net/1721.1/109261 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 https://orcid.org/0000-0003-2517-1685 en_US http://dx.doi.org/10.1111/1475-679x.12127 Journal of Accounting Research Creative Commons Attribution-Noncommercial-Share Alike http://creativecommons.org/licenses/by-nc-sa/4.0/ application/pdf Wiley Blackwell SSRN |
| spellingShingle | Minnis, Michael Sutherland, Andrew Gordon Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans |
| title | Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans |
| title_full | Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans |
| title_fullStr | Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans |
| title_full_unstemmed | Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans |
| title_short | Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans |
| title_sort | financial statements as monitoring mechanisms evidence from small commercial loans |
| url | http://hdl.handle.net/1721.1/109261 https://orcid.org/0000-0003-2517-1685 |
| work_keys_str_mv | AT minnismichael financialstatementsasmonitoringmechanismsevidencefromsmallcommercialloans AT sutherlandandrewgordon financialstatementsasmonitoringmechanismsevidencefromsmallcommercialloans |