Accounting quality and financing arrangements in emerging economies

Abstract

Purpose

This paper aims to investigate how borrowers’ accounting quality influences bank loan syndicates across 11 emerging markets. Furthermore, an investigation of whether the relationship between accounting quality and the bank loan syndicate structure is influenced by borrowers’ governance standards is conducted.

Design/methodology/approach

To empirically test the research question, a sample including 11 emerging countries is constructed. Following Chen et al. (2011), an accounting quality measure is constructed by aggregating the three commonly used indicators developed by Kothari et al. (2005), McNichols and Stubben (2008) and Dechow and Dichev (2002). A univariate analysis and a multivariate analysis are conducted to investigate the relationship between accounting quality and bank loan syndicate structure after controlling for firm characteristics and other variables.

Findings

The results of this research show that lead lenders need to retain more ownership and organize a more concentrated loan syndicate when borrowers have poor accounting quality because they must show their commitment to monitoring borrowers. In addition, lead lenders have fewer foreign lenders involved in a loan syndicate and these foreign lenders retain less loan ownership if borrowers’ accounting quality is poor because lead banks prefer local lenders who are more familiar with borrowers. Finally, the effects of accounting quality on bank loan syndicates are more significant for borrowers with superior governance because the credibility of accounting numbers generated by a well-governed borrower is better.

Originality/value

The existing studies (Ball et al., 2008; Lee and Mullineaux, 2004; Sufi, 2007) have shown how information asymmetry and accounting quality affect loan syndicates in developed countries. This strand of literature is extended by the presentation of significant effects of accounting quality on financing arrangements, even in emerging economies with weak governance standards. This stream of literature is also extended by finding the interaction effects between accounting quality and governance standards on bank loan syndicates, a relationship which has not been examined by the existing literature (Ball et al., 2008).

Citation

Song, L. (2016), "Accounting quality and financing arrangements in emerging economies", International Journal of Accounting & Information Management, Vol. 24 No. 1, pp. 2-19. https://doi.org/10.1108/IJAIM-09-2014-0061