Accounting quality and financing arrangements in emerging economies

• Published date: 07 March 2016
• Pages: 2-19
• Date: 07 March 2016
• DOI: https://doi.org/10.1108/IJAIM-09-2014-0061
• Author: Liang Song
• Subject Matter: Accounting & Finance,Accounting/accountancy,Accounting methods/systems

Accounting quality and nancing

arrangements in

emerging economies

Liang Song

University of Massachusetts Dartmouth, Dartmouth, Massachusetts, USA

Abstract

Purpose – This paper aims to investigate how borrowers’ accounting quality inuences bank loan

syndicates across 11 emerging markets. Furthermore, an investigation of whether the relationship

between accounting quality and the bank loan syndicate structure is inuenced 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 rm 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 signicant 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; Su, 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 signicant effects of accounting

quality on nancing arrangements, even in emerging economies with weak governance standards. This

stream of literature is also extended by nding 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).

Keywords Emerging market, Accounting quality, Bank loan syndicate

Paper type Research paper

1. Introduction

Syndicated loan nancing usually involves more than one lender, based on a loan

syndicate of shared ownership (Su, 2007). Syndicated loans have recently become the

largest nancing market (Sreedhar et al., 2008). It generates greater underwriting prot

JEL classication – M41, G15, G24, G38

Portions of this research were completed when Dr Liang Song was an Assistant Professor of

accounting at Michigan Technological University and was at the Bank of Finland, Finland.

The current issue and full text archive of this journal is available on Emerald Insight at:

www.emeraldinsight.com/1834-7649.htm

IJAIM

24,1

2

Received 11 September 2014

Revised 10 October 2014

Accepted 30 October 2014

InternationalJournal of

Accountingand Information

Management

Vol.24 No. 1, 2016

pp.2-19

©Emerald Group Publishing Limited

1834-7649

DOI 10.1108/IJAIM-09-2014-0061

than equity and bond nancing and accounts for about half of the US corporate

nancing market (Weidner, 2000). Thus far, syndicated loan nancing in emerging

economies totals more than US$250,000 billion, and the total market continues to

expand (Godlewski and Weill, 2008). I explore the effects of borrowers’ accounting

quality on bank loan syndicates in emerging economies and investigate whether the

relationship between accounting quality and the bank loan syndicate structure is

inuenced by borrowers’ governance standards.

To empirically test the research question, I use a sample of 11 emerging countries.

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). This accounting quality

measure directly corresponds with the deviation between a company’s earnings and

cash ow, i.e. the higher the accounting quality, the more deviation between the

company’s earning number and cash ow. Superior accounting quality can reduce

borrowers’ information asymmetry problems because it can improve banks’ predictions

about borrowers’ future ability to repay their debts (Bharath et al., 2008).

I nd that there is less lead bank loan ownership and loan syndicates are less

concentrated if borrowers have better accounting quality. I also nd that bank loan

syndicates involve more foreign participating banks and more foreign bank loan

ownership exists if borrowers have superior accounting quality. These ndings imply

that superior accounting quality can increase banks’ ability to predict borrowers’ future

cash ow, which will result in future debt repayment. Because of the reduced

information asymmetry problems, a lower proportion of lead bank loan share is needed

to show lead lenders’ commitment. In addition, more foreign participating banks can be

involved, although they may be less familiar with borrowers than local banks (Su,

2007). Finally, the effects of accounting quality on bank loan syndicates are more

pronounced for well-governed borrowers in terms of country- and rm-level measures.

These results suggest that accounting numbers generated in poorly governed

environments are less credible; therefore, banks give less weight to them.

This paper makes several contributions to the eld. Existing studies (Ball et al., 2008;

Lee and Mullineaux, 2004;Su, 2007) show how information asymmetry and accounting

quality affect loan syndicates in developed countries. However, it is likely that the

effects of accounting information are different in emerging economies compared with

developed countries because there is not enough analyst and media coverage or enough

investor protection in the former (Chen et al., 2011). First, this paper describes the

signicant effects of accounting quality on nancing arrangements in emerging

economies, which conrms that the ndings for developed countries (Ball et al., 2008) are

also true in an environment with weak governance standards. This stream of literature

is also extended by nding the interaction effects between accounting quality and

governance standards on bank loan syndicates, a relationship which has not been

examined in the existing literature (Ball et al., 2008).

Second, extant literature (Esty and Megginson, 2003;Qian and Strahan, 2007)

describes the direct inuence of corporate governance on bank loan syndicates. This

research contributes to the existing stream of literature by showing the effects of

governance mechanisms on the relationship between borrowers’ accounting quality and

nancing arrangement decisions, an indirect inuence of corporate governance on bank

3

Accounting

quality