Credit Loans, Institutional Background And Accounting Quality

Bank financing has always been an important source of external funding for corporations. However, commercial banks of China mainly grant secured loans (including collateral, pledge and suretyship) to control risk at present, which made corporations short of collaterals hard to get bank loans, especially small firms. This paper attempts to study the effect of accounting quality on lending decisions of credit loans.Bank loans are commonly classified into four kinds according to its nature: collateral, pledge, suretyship and credit loans. "Collateral and pledge" means that banks can control part of the firm's properties, "suretyship" means that banks have recourse to guarantors, and these three kinds of loans are secured loans, while "credit" means that banks can only depend on the firm's credibility.As a matter of fact, as the body undertaking risk is different to loans of different nature, the role of accounting information acting in the lending decision making process is different. There are guarantors or collaterals for secured loans, and in case that the borrower fails to repay the loan, banks can ask the guarantors to repay it or enforce the collaterals sold by auction, which ensures the safety of the loan, therefore, compared to the information of the guarantors and collaterals, the demand for firms' accounting information is lower. However, as there is no guarantor or collateral while offering a credit loan, bank officers need to analyze the borrower's accounting information comprehensively to reduce the risk to the bottom. This indicates that the nature structure of loans is closely correlated with the role of accounting information in making credit decisions, and their relation can be indeed complicated.Under the specific institution background of China, taking the quality of accounting information and the ratio of credit loans to total bank loans as our subject of study, and based on the theory of debt covenant and contract perspective of accounting information, this paper does an empirical research by using statistics of listed companies on the Chinese stock market during the year 2001 and year 2007.Our conclusions indicate that:1. After controlling for the other determinants of credit decisions, we find that accounting quality has a significant impact on the lending decision making of credit loans——corporations with better quality of accounting information are favored by banks, ceteris paribus, they can get higher ratio of bank credit loans.2. Ownership property serves as an invisible guarantee of state-owned enterprises, which weakens the relation between accounting quality and the ratio of credit loans to total bank loans, and in non-state-owned enterprises, the quality of accounting information is still positively correlated with the ratio of credit loans to total bank loans. This indicates that a high quality of accounting information is important to non-state-owned enterprises in their process of acquiring credit loans.3. The intermediate layer of corporations affects the lending decision making of credit loans. Corporations with more intermediate layers provide an invisible guarantee and more relative information, which weakens the relation between accounting quality and the ratio of credit loans to total bank loans and in corporations with less intermediate layers, the quality of accounting information is still positively correlated with the ratio of credit loans to total bank loans.4. Regions'financial market development is unbalanced in our country, and a lower degree of financial market development weakens the relation between accounting quality and the ratio of credit loans to total bank loans. In the well developed financial market, credit decisions of banks are independent from other interventions, and banks'control of risk is relatively stricter, consequently, the quality of accounting information is still positively correlated with the ratio of credit loans to total bank loans.This paper investigates the support mechanism of accounting information in credit decisions by considering the specific institution background of China and distinguishing between accounting information and collateral information, which enriches the contract perspective of accounting information, and our results shed light on how institution background play an important role in the manner in which banks respond to the quality of accounting information of borrowers. Our conclusions also provide a theoretical support and a policy suggestion for improving credit decision process of commercial banks of China. As for the small firms to which credit loans are unavailable, this paper brings forward a proposal to attenuate the asymmetric information problems:it is worthwhile to invest in the accounting information systems.