Accounting conservatism, and bank loan contracts: Evidence from China

Abstract

Accounting conservatism plays an important role in bank loan contracts. A high degree of accounting conservatism can reduce the risks faced by bank lenders through reporting losses in a timely manner. Banks may then offer preferential policies to borrowers. This paper investigates this hypothesis, using hand-collected data on bank loans granted to Chinese A-share listed companies from 2000 to 2007. The empirical results show that companies with stronger conservatism tend to obtain larger loan amounts with lower interest rates and longer maturities. In addition, we find that the effect of accounting conservatism on bank loans is more significant in regions with better legal environments, more preferential policies, and less intervention from the local government.