| This paper examines the relation between conservatism in borrowers' financial reporting and their dependence on bank debt financing. Using 4,114 firm-year observations over the period 1988--2001, the analyses suggest that a firm's accounting conservatism is increasing in both the magnitude and length of a bank loan. This finding holds after controlling for both the effects of other corporate governance mechanisms and other explanations for accounting conservatism including debt covenants. These results indicate that for bank-dependent firms, banks are an important corporate governance mechanism in the United States. These results also indicate that the governance role of banks is broader than the imposition of debt covenants. This paper also examines the association between bank loan characteristics and a bank's governance activities, finding no evidence of an association. |
