Jochen Bigus

Bank Relationships and Private Firms’ Financial Reporting Opacity

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.

Shareholder Loans and Earnings Smoothing – Empirical Findings from German Private Firms

Abstract This paper analyzes the interplay between shareholder loans and earnings smoothing in German private corporations. Shareholders who grant loans have a dual stakeholder role, being both equity holders and creditors. Those loans could be lost, because bankruptcy law requires their subordination in the event of bankruptcy. We therefore expect shareholder loans to mitigate agency problems of debt. This reduces the need for debt covenants and earnings smoothing. Moreover, the interest payments from shareholder loans tend to lower payout volatility which also reduces the need for dividend and earnings smoothing. We expect and find that private firms with shareholder loans exhibit significantly lower levels of earnings smoothing than other private firms. We find that with a 10 percentage-point increase in the shareholder loans to total assets ratio, earnings smoothing decreases by about 10% of the mean value. We also find that this substitution effect usually occurs in case of managerial ownership and tends to be slightly weaker in the event of dispersed ownership. The results are robust for different econometric specifications, including different measures of key variables and propensity score matching. The paper suggests that financial reporting by private firms responds to the dual stakeholder role of shareholder loans.

Consequences of Different Eurobond Proposals in the Eurozone

We analyze economic features and consequences of those Eurobond proposals, which are in our view the most important and the most diverging ones and require different legal changes. These include all three proposals in the green book of the EU-commission, among them the Delpla von Weizsacker proposal, the proposal for pro rata bonds and the proposal to mutualize all debts with joint liability, the proposal of the German council of Economic experts to mutualize all debts of member countries above 60 per cent of their GNP and the proposal of Favero & Missale (2012) for Eurobonds without risk shifting. More specifically, we aim to analyze whether Eurobonds indeed imply the consequences that are often assumed to take place, such as a decreasing interest burden of distressed countries. We ask especially the following questions. Are the above proposals suited to reduce the fiscal burden of a distressed country? Do they promote or reduce reckless lending of creditors and debtors? Do they provide more safe assets in the Eurozone thus strengthening the demand from outside the Eurozone and reduce costs for issuers? Which effect has the expectation of a bail out or “ex post solidarity” (Tirole 2015) with a country in distress to avoid conflagration in other countries?

Optimism and auditor liability

There is strong evidence that individuals are optimistic in the sense that they underrate the probability of a negative event occurring. This paper provides a positive theoretical analysis of how auditor optimism affects their incentives to take care under two liability rules: strict liability and a negligence rule. Under strict liability, auditors are held liable when they cause damages to investors. Under a negligence rule, auditors are held liable when they cause damages and in addition, act negligently, that is, fail to meet the standard of due care specified in legal and professional rules. I find the following results. (1) If due care is sufficiently close to the efficient level, a negligence rule distorts auditors’ incentives less than strict liability. Under strict liability, optimism makes the auditor overestimate the chances of finding material mistakes and thus induces suboptimal care. (2) If due care is too strict, the auditor will not exert due care but the same level of suboptimal care under either liability rule. (3) With increasing optimism and in the absence of punitive damages, strict liability becomes less preferable to a precise negligence rule. This statement also holds for vaguely defined standards of due care if due care is sufficiently strict or if auditor optimism is sufficiently high. (4) Punitive damages counteract suboptimal incentives generated by auditor optimism, especially under strict liability.

Does Relationship Lending Require Opaque (and Conservative) Financial Reporting

Private firms often rely on insider lending, e.g. by banks. Insider lending is based on lending relationships that typically involve intertemporal loan pricing: losses from early years are recovered by information rents in later years, stemming from private information the inside lender has regarding the firms creditworthiness. Our model shows that overly transparent financial reporting reduces the inside lenders information rent such that the lender has an insufficient incentive to offer early stage financing. Conservative reporting often is more effective to enable relationship lending than aggressive reporting. This paper thus offers a new rationale for why financial reporting by private firms is conservative and opaque. It also shows when accounting standards help firms to credibly commit to sufficiently conservative and opaque financial reporting.

Accounting Conservatism and Creditor Conflicts

This paper presents a model showing that accounting conservatism affects creditor coordination when the borrowing firm is in financial distress. There are two effects. First, accounting conservatism tends to reduce dividend payments and to keep assets within the firm (dividend restriction effect). Second, it biases expectations of financial distress (information bias effect). In financial distress, the dividend restriction effect may induce a costly prisoner’s dilemma situation in which some creditors are tempted to call a loan before other creditors do so. This dilemma occurs when there are sufficient assets, i.e. when accounting conservatism is sufficiently strong. The information bias effect makes the prisoner’s dilemma less likely to occur, since creditors cannot be sure that a “bad” financial report implies financial distress. The latter result suggests that conservative accounting might be desirable in the banking industry where inefficient creditor coordination (bank run) is more likely and its costs are quite substantial. Accounting conservatism may also be beneficial in the sense that the threat of a prisoner’s dilemma provides stronger incentives to the debtor to avoid financial distress. The model explains why we observe more accounting conservatism with private debt than with public debt and why informed creditors receive more collateral.

Höhe, Einflussfaktoren und Konsequenzen von Insolvenzkosten

Der (drohende) Ausfall von Glaubigeranspruchen verursacht direkte und indirekte Kosten, welche das Unternehmensvermogen und damit die vorhandenen finanziellen Mittel zur Begleichung dieser Anspruche weiter verringern. Dieser Aufsatz geht drei Fragen nach: Wie hoch sind die Kosten, wenn ein Unternehmen in den Konkurs geht oder zu gehen droht und welche Faktoren beeinflussen die Hohe der Insolvenzkosten? Die dritte Frage lautet: Was sind die Konsequenzen niedriger oder hoher Insolvenzkosten fur Finanzierungs- und Investitionsentscheidungen des Managements?