Monitoring by a single banker and accounting conservatism: evidence from India

Abstract

Purpose

This paper aims to investigate the effect of bank monitoring on conditional conservative accounting of Indian listed firms. Drawing on bank monitoring and relationship lending literature, the study hypothesizes that monitoring by a single bank reduces the bank’s demand for conservatism-facilitated control transfers.

Design/methodology/approach

The empirical design is composed of three steps. In the first step, using data on Indian firms listed in NSE and BSE for the period 2000–2019, market-based firm-year measure and accrual cash flow-based firm-year measure of conditional conservatism is estimated. In the second step, we test the hypothesis using multivariate panel regression corrected for heteroskedasticity and incorporating firm and year-fixed effects. In the third step, we test for the robustness of the results using Heckman’s correction approach.

Findings

Results indicate that firms which are monitored by a single bank tend to be less conservative. Also, the negative association between single bank monitoring and conservatism is stronger when the firm’s debt structure is dominated by bank debt.

Research limitations/implications

The study’s scope does not include analyzing the influence of characteristics of the single banker monitoring the firm. Future research could investigate attributes like ownership of the banker as a possible source of variation in the relationship documented in this study.

Practical implications

Accounting standard-setting boards are now discouraging implementation of conservatism to avoid bias in financial reporting. This paper finds that a strong bank–firm relationship can be a possible substitute for conservatism.

Originality/value

The study sheds new light on the debt structure–conservatism relationship. Bank’s availability of inside information through the transaction account and its impact on lending relationships is established in the literature. However, the literature on the determinants of conservatism has not examined how the benefit enjoyed by the firm’s single banker, possessing all the information in the transaction account can lead to bank’s reduced dependence on financial statements and subsequently reduced accounting conservatism of borrowing firms.

Citation

Pradeep, K. and Baag, P.K. (2024), "Monitoring by a single banker and accounting conservatism: evidence from India", Journal of Accounting in Emerging Economies, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAEE-06-2023-0187