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Commercial Lenders' Use of Accounting Information in Interaction with Source Credibility

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  • PHILIP R. BEAULIEU

Abstract

. The credibility of individual commercial borrowers, which lenders refer to as “character,†affects lenders' use of accounting information. This effect of source credibility is subtle compared to the effect of external audits on the use of financial statements in other contexts. It is hypothesized that accounting facts must be positive (supporting loan approval) for character facts to influence lenders' judgments and loan decisions. Character facts will not affect judgments or loan decisions significantly when accounting facts are negative (supporting loan denial). This accounting/character interaction is predicted to become stronger as lenders gain experience and develop criteria for evaluating character. In an experiment, lenders read a loan application that contained facts concerning accounting, character, and other information; the accounting and character facts were manipulated to be either positive or negative, resulting in four versions of the application. The lenders recommended approval or denial of the loan and estimated the likelihood that the loan would be fully repaid (a risk estimate). Interactive effects of accounting and character facts on lenders' loan decisions and risk estimates were found, but the accounting/character interactions generally did not vary with experience level. One notable difference was that experienced lenders never approved loans when accounting facts were negative, but inexperienced lenders sometimes did.

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  • Philip R. Beaulieu, 1994. "Commercial Lenders' Use of Accounting Information in Interaction with Source Credibility," Contemporary Accounting Research, John Wiley & Sons, vol. 10(2), pages 557-585, March.
    • Handle: RePEc:wly:coacre:v:10:y:1994:i:2:p:557-585
    DOI: 10.1111/j.1911-3846.1994.tb00406.x
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    1. Andersson, Patric, 2004. "Does experience matter in lending? A process-tracing study on experienced loan officers' and novices' decision behavior," Journal of Economic Psychology, Elsevier, vol. 25(4), pages 471-492, August.
    2. Fangjun Wang & Luying Xu & Fei Guo & Junrui Zhang, 2020. "Loan Guarantees, Corporate Social Responsibility Disclosure and Audit Fees: Evidence from China," Journal of Business Ethics, Springer, vol. 166(2), pages 293-309, October.
    3. B. William Demeré & Karen L. Sedatole & Alexander Woods, 2019. "The Role of Calibration Committees in Subjective Performance Evaluation Systems," Management Science, INFORMS, vol. 65(4), pages 1562-1585, April.
    4. Rosman, Andrew J. & Bedard, Jean C., 1999. "Lenders' Decision Strategies and Loan Structure Decisions," Journal of Business Research, Elsevier, vol. 46(1), pages 83-94, September.
    5. Beaulieu, Philip R., 1996. "A note on the role of memory in commercial loan officers' use of accounting and character information," Accounting, Organizations and Society, Elsevier, vol. 21(6), pages 515-528, August.
    6. Quick, Reiner & Gauch, Kevin, 2021. "Is assurance on risk management systems relevant for bankers’ decisions?," Advances in accounting, Elsevier, vol. 55(C).
    7. Leif Atle Beisland & Bert D’Espallier & Roy Mersland, 2019. "The Commercialization of the Microfinance Industry: Is There a ‘Personal Mission Drift’ Among Credit Officers?," Journal of Business Ethics, Springer, vol. 158(1), pages 119-134, August.
    8. Wiklund, Johan & Baker, Ted & Shepherd, Dean, 2010. "The age-effect of financial indicators as buffers against the liability of newness," Journal of Business Venturing, Elsevier, vol. 25(4), pages 423-437, July.
    9. Schneider, Arnold, 2018. "Studies on the impact of accounting information and assurance on commercial lending judgments," Journal of Accounting Literature, Elsevier, vol. 41(C), pages 63-74.
    10. DeZoort, F. Todd & Holt, Travis & Taylor, Mark H., 2012. "A test of the auditor reliability framework using lenders’ judgments," Accounting, Organizations and Society, Elsevier, vol. 37(8), pages 519-533.
    11. Gregory Shailer, 1999. "The relevance of owner-manager signals and risk proxies to the pricing of bank loans," Accounting and Business Research, Taylor & Francis Journals, vol. 30(1), pages 57-72.
    12. Richard Houston & Michael Peters, 2001. "The effect of a potential borrower's reporting reputation and financial condition on commercial loan officers' estimates of forecast bias and subsequent loan recommendations," Accounting and Business Research, Taylor & Francis Journals, vol. 31(3), pages 163-174.
    13. Shepherd, Dean A. & Wiklund, Johan & Haynie, J. Michael, 2009. "Moving forward: Balancing the financial and emotional costs of business failure," Journal of Business Venturing, Elsevier, vol. 24(2), pages 134-148, March.
    14. Sylvain Durocher & Anne Fortin, 2009. "Proposed Changes in Lease Accounting and Private Business Bankers' Credit Decisions," Accounting Perspectives, John Wiley & Sons, vol. 8(1), pages 9-42, February.
    15. Xiao, Xinning & Shailer, Greg, 2022. "Stakeholders’ perceptions of factors affecting the credibility of sustainability reports," The British Accounting Review, Elsevier, vol. 54(1).
    16. Searcy, DeWayne L. & Ward, Terry J. & Woodroof, Jon B., 2009. "Continuous reporting benefits in the private debt capital market," International Journal of Accounting Information Systems, Elsevier, vol. 10(3), pages 137-151.
    17. Cassar, Gavin & Ittner, Christopher D. & Cavalluzzo, Ken S., 2015. "Alternative information sources and information asymmetry reduction: Evidence from small business debt," Journal of Accounting and Economics, Elsevier, vol. 59(2), pages 242-263.

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