REVISION: Commercial Lending Concentration and Bank Expertise: Evidence from Borrower Financial Statements
Concentration features prominently in models of information acquisition by banks. However, empirical evidence on the role of concentration is limited because banks rarely disclose details about their exposures or the information they collect. Using a novel dataset of bank-level commercial loan exposures, we find banks are less (more) likely to collect audited financial statements from firms in industries in which they have more (new) exposure. We exploit variation in the impact of the housing boom on construction lending to confirm these findings. The negative relation between exposure concentration and audited financial statement collection increases with bank size, suggesting scale is an important mechanism in information acquisition. Our results offer novel evidence on how lending concentration is related to the type of financial information used by the bank, suggesting that focus reveals a bank’s relative expertise.
REVISION: Financial Statements as Monitoring Mechanisms: Evidence from Small Commercial Loans
Theory offers competing predictions about the use of financial statements as a monitoring device in debt contracting. We use a proprietary dataset which records banks’ ongoing requests of information from small commercial borrowers after loan origination to examine these theories. We find 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 ...
REVISION: Credit Cycles and Financial Statement Verification
We use the US construction industry during the years 2002 to 2011 as a setting to examine whether credit cycles affect the use of financial statement verification in debt financing. Our estimates reveal that banks reduced their collection of unqualified audited financial statements from construction firms at nearly twice the rate of firms in other industries during the housing boom period before 2008. This reduction was most severe in the regions that experienced the most significant construction loan growth. These trends reversed during the subsequent housing crisis in 2008 to 2011 when the credit cycle reversed. Moreover, using bank and firm level data we find a strong negative (positive) relation between audited financial statements and subsequent loan losses (construction firm survival). Collectively, our results reveal that macroeconomic credit fluctuations produce temporal shifts in the overall level of financial statement verification in the economy and that temporal shifts in ...
REVISION: Knowledge, Compensation, and Firm Value: An Empirical Analysis of Firm Communication
Knowledge is central to managing an organization, but its presence in employees is difficult to measure directly. We hypothesize that external communication patterns reveal the location of knowledge within the management team. Using a large database of firm conference call transcripts, we find that CEOs speak less in settings where they are likely to be relatively less knowledgeable. CEOs who speak more are also paid more, and firms whose CEO pay is not commensurate with CEO speaking have a lower industry-adjusted Tobin’s Q. Communication thus appears to reveal knowledge.
REVISION: Which Private Firms Follow GAAP and Why?
We provide new evidence on the production of audited GAAP financial statements by large U.S. privately held firms. We find that over 60% of these firms, which control $4 trillion of assets, do not produce audited GAAP financial statements. Using across industry, within industry, and within firm tests over time, our analyses reveal that several important characteristics — such as profitability, firm age, growth, ownership changes, and presence of intangibles — partially explain this variation. These findings are consistent with financial statements reducing information asymmetry and serving a stewardship role. However, economically substantial variation remains unexplained by traditional variables. Our findings suggest that incomplete contracting and alternative mechanisms, such as relationships and tangible assets, are useful alternatives to producing audited GAAP financial statements, even for large firms. Our study informs researchers, standard setters, and regulators on the actual ...
REVISION: Investor Relations and the Flow of Information through Investor Networks
This study develops a model to examine how companies' investor relations can impact the dissemination of information and how the dissemination of information affects the time-series behavior of bid-ask spreads. In our model, investors become aware of the information release either directly from investor relations or via person-to person communication. The person-to-person communication then spreads in a network of heterogeneous individuals, where some serve as 'hubs' with high connectivity to others. We show that the optimal investor relations strategy relies on targeting highly connected investors, especially for time-sensitive and complex information. We also show that targeted disclosure can reduce bid-ask spreads over long horizons, indicating a benefit in terms of lower trading costs. We also show that investor relations activities to expand the investor base facilitate the optimal information release by increasing the number of hub-type investors who follow the company and ...
REVISION: A Measure of Competition Based on 10-K Filings
In this paper we develop a measure of competition based on management’s disclosures in their 10-K filing and find that firms’ rates of diminishing marginal returns on new and existing investment vary significantly with our measure. We show that these firm-level disclosures are related to existing industry-level measures of disclosure (e.g. Herfindahl index), but capture something distinctly new. In particular, we show that the measure is associated with the rates of diminishing marginal retu
New: The Value of Verification in Debt Financing: Evidence from Private U.S. Firms
I examine how verification of financial statements influences debt pricing. I use a large proprietary database of privately-held U.S. firms, an important business sector in which the information environment is opaque and financial statement audits are not mandated. I find that audited firms have a significantly lower cost of debt and that lenders place more weight on audited financial information in setting the interest rate. Further, I provide evidence of a mechanism for this increased financia