Journal of Banking & Finance
Volume 33, Issue 2, February 2009, Pages 425–434
 

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Sungyoon Ahn, Wooseok Choi,
Korea University, Business School, Anam-Dong, Seongbuk-Gu, Seoul 136-071, Republic of Korea
http://dx.doi.org/10.1016/j.jbankfin.2008.08.013



Abstract

In this paper, we examine the corporate governance role of banks by investigating the effect of bank monitoring on the borrowers’ earnings management behavior. Our analyses suggest that a borrowing firm’s earnings management behavior generally decreases as the strength of bank monitoring increases. The strength of bank monitoring is measured as (1) the magnitude of a bank loan, (2) the reputation (rank) of a lead bank, (3) the length of a bank loan, and (4) the number of lenders. These results imply that bank monitoring plays an important role in the corporate governance of bank-dependent firms. We further examine other bank loan characteristics (collateral, refinancing, loan types, and loan purposes) and their effects on borrowers’ earnings management behavior. Our analyses show that collateral and loan types are significantly associated with borrowers’ earnings management behavior while refinancing and loan purposes have no association.

Keywords
Bank monitoring;
Bank loans;
Corporate governance;
Earnings management