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

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  • Zhang, Xinyue
  • Zhong, Yuxiang
  • Li, Wanli

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.

Suggested Citation

  • Zhang, Xinyue & Zhong, Yuxiang & Li, Wanli, 2022. "The effect of borrowers' accounting conservatism on lenders' loan loss provisions: Evidence from China's banking industry," International Review of Financial Analysis, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:finana:v:82:y:2022:i:c:s1057521922001752
    DOI: 10.1016/j.irfa.2022.102214
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    More about this item

    Keywords

    Accounting conservatism; Information asymmetry; Information transfer; Loan loss provisions;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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