The Effect of Governance on Credit Decisions and Perceptions of Reporting Reliability

33 Pages Posted: 14 Jan 2008 Last revised: 23 Jun 2009

See all articles by Lori Holder-Webb

Lori Holder-Webb

Western New England University - Department of Accounting and Finance

Divesh Sharma

Kennesaw State University, School of Accountancy

Date Written: January 9, 2008

Abstract

We conduct an experiment to assess lenders' evaluation of board strength when making lending judgments and evaluating the reliability of financial reports. Our participant pool consists of 62 professional lenders whom we ask to make credit decisions and evaluate reporting reliability on an experimental basis. We predict that governance strength and perceived reliability affect lending decisions. We find that lenders are primarily sensitive to financial condition and the perceived reliability of financial reporting. While we also find that lenders are sensitive to board strength, further tests suggest lenders appear particularly sensitive to board strength only for relatively high-performing firms. Underperforming firms do not appear to be able to increase their chances of receiving a loan if they have a strong board. We also find that the perceived reliability of the financial reports does not appear to be affected by board strength or by the applicant's financial condition. The paper discusses implications for policy making, practice, and re-search.

Keywords: governance, experiment, credit decision, reporting quality

JEL Classification: C91, F39, G21, G30, M40

Suggested Citation

Holder-Webb, Lori and Sharma, Divesh Shankar, The Effect of Governance on Credit Decisions and Perceptions of Reporting Reliability (January 9, 2008). Behavioral Research in Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1081636 or http://dx.doi.org/10.2139/ssrn.1081636

Lori Holder-Webb

Western New England University - Department of Accounting and Finance ( email )

United States

Divesh Shankar Sharma (Contact Author)

Kennesaw State University, School of Accountancy ( email )

Kennesaw, GA 30144
United States

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