Accounting Webinar (2020-11)

Topic: Accounting Information and Risk Shifting with Asymmetrically Informed Creditors

Speaker: Jing Li, The University of Hong Kong

Time: Wednesday, Sep 23^th, 10:00-11:30 a.m

Place: Microsoft Teams

Abstract:

This paper explores the role of accounting information precision in a relational lending setting where a borrower can engage in risk shifting (asset substitution).Inside (incumbent) creditors typically have private information about the borrower's state from prior lending engagements, but nevertheless compete for future loans without- side creditors who have access only to (public) accounting information. By reducing the inside creditor's information advantage, accounting information affects ex-post lending competition. We show that if the prior belief about the borrower's state is low, more precise public information may increase active participation by outside creditors, and thereby reduce the expected debt repayment, which alleviates the firm's risk-shifting incentive. Conversely, for optimistic priors, accounting precision tends to exacerbate risk shifting. We further study how accounting information precision affects the stability of relationship lending (i.e., the propensity of creditor switching) and discuss implications for financial reporting regulations along the business cycle.

Introduction:

Dr. Jing Li received her Ph.D. in Accounting from Columbia University in 2009 and worked as an assistant professor of accounting at Carnegie-Mellon University before joining HKU in 2016. Her research focuses on financial accounting issues related to banking, debt contracting, disclosure, and risk-return trade-offs.

https://www.fbe.hku.hk/people/academic/jing-li

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