We examine the correlation between bank loan approval standards and accounting conservatism. Using the bank loan approval index in the People’s Bank of China as measure of loan standard, we show that accounting conservatism improves when bank loan approval standards are tightened. We then conduct further tests to address the endogeneity and robustness, yielding highly consistent results. Finally, both ownership and the banking connection significantly moderate the relationship between bank loan approval standards and accounting conservatism. Our findings provide policy implications on controlling loan approval standards, which may effectively reduce credit risks and promote accounting conservatism.
Credit risk uncertainty for banks has increased since the global financial crisis in 2008 and the 2019 outbreak of the Coronavirus disease 2019 (COVID-19) pandemic. This heightened credit risk uncertainty has led commercial banks to focus more on loan issuance, increasing difficulties for enterprises to secure financing (Goodell, 2020). From the perspective of commercial banks, enterprise solvency is a crucial factor in determining whether to lend, reflected in the disclosure of accounting information. Accounting conservatism, an important indicator of accounting information quality, is often considered to reduce credit risks for commercial banks when approving loans. From the perspective of enterprises, bank loan approval standards indicate the availability of loans and determine the loan interest rate and amount, which directly affect the financing costs of enterprises. Therefore, exploring the influence of bank loan approval standards on enterprises’ accounting conservatism can reduce information asymmetry between commercial banks and enterprises, decrease credit risk for commercial banks, and help high-quality enterprises obtain more credit support.
This study examines the relationship between bank loan approval standards and corporate accounting conservatism to fill the research gap. Previous studies mainly examine the measurement method of accounting conservatism (Basu, 1997), the causes (Watts, 2003), the determinant factors (Shaw et al., 2021), and the economic consequences (Bonetti et al., 2017). Among them, the earnings-stock return measurement method proposed by Basu (1997) is the most widely used, and its measurement results are more accurate than other measurement methods. Other scholars have also adopted the accrual and NI models based on the accrual basis proposed by Ball and Shivakumar (2005). Watts (2003) found that most extant studies focus on contractual relationships, shareholder litigation, accounting control, and government tax, among which debt contract is the most concentrated research.
This paper presents an empirical analysis of the impact of bank loan approval standards on firms’ accounting conservatism. The research findings reveal the following insights.
1. Bank loan approval standards can affect firms’ accounting conservatism, and these two variables have a significant negative correlation. As bank loan approval standards increase in stringency, commercial banks exhibit a declining willingness to lend, consequently reducing the success rate of enterprise loan approvals. To obtain the required loans, enterprises must enhance the quality of accounting information and improve accounting conservatism.
2. State-owned enterprises demonstrate a higher level of accounting conservatism. State-owned enterprises possess unique characteristics and relatively strong creditworthiness, resulting in lower credit risks for banks than non-state-owned enterprises. Given their social responsibilities, capital requirements, and the desire to maintain favorable access to bank loans, state-owned enterprises proactively adopt more robust financial reporting methods to ensure higher-quality accounting information.
3. The background of senior executives in the banking sector can influence the integrity of corporate accounting practices to a certain extent. When corporate executives possess banking experience, their inclination toward accounting conservatism tends to be weaker than executives from other industries. Executives with banking experience foster higher trust between banks and enterprises, leading to relaxed lending requirements and expanded loan availability. As a result, accounting conservatism decreases in these circumstances.