Bank Relationships and Private Firms’ Financial Reporting Opacity

Abstract

Private firms with relatively high costs of disclosure may benefit from a close relationship with a bank. Relationship lending is based on intertemporal contracting and requires the bank to acquire private information about the firm and, moreover, to keep this information private. For both reasons, we expect and find that private firms with fewer bank relationships exhibit higher levels of financial reporting opacity. Controlling for many other factors, firms with a single bank relationship exhibit more earnings management exceeding the median value of the three-year sum of absolute discretionary accruals by about 20%. They also disclose their financial reports about 14 days later and are considerably more likely to miss the mandatory filing date. The length of such firms’ financial reports is also smaller, containing approximately 7.4% fewer characters than the median report. The results are robust to different econometric specifications including endogeneity concerns. They indicate that private firms choose to be opaque in the presence of relationship lending.