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

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.