The role of bank monitoring in corporate governance: Evidence from borrowers' earnings management behavior

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 put-poses have no association. (c) 2008 Elsevier B.V. All rights reserved.