Effects of Small Business Accounting Bases and Accountant Service Levels on Loan Officer Decisions

Baker, William; Cunningham, Gary

doi:10.1111/j.1468-5957.1993.tb00269.x

Cited by 7 publications

(5 citation statements)

References 5 publications

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“…Much of the accounting literature assumes that accrual accounting is more informative than cash accounting, and surveys find that small business lenders rate accrual accounting their preferred source of financial information for decision-making (Baker and Cunningham, 1993;AICPA, 2004).…”

Section: Accounting-based Lendingmentioning

confidence: 99%

Alternative information sources and information asymmetry reduction: Evidence from small business debt

Cassar

Ittner

Cavalluzzo³

2015

Journal of Accounting and Economics

143

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We examine whether more sophisticated accounting methods (in the form of accrual accounting) interact with other information sources to reduce information asymmetries between small business borrowers and lenders, thereby lowering borrowers‫׳‬ probability of loan denial and cost of debt. We find that higher third party credit scores, but not the use of accrual accounting, decrease the likelihood of loan denial. However, firms using accrual accounting exhibit statistically lower interest rates after controlling for many factors associated with the cost of debt. Further, the interest rate benefits from accrual accounting are greatest when the borrower‫׳‬s credit score is low and/or the length of its banking relationship with the lender is short. This evidence indicates that accrual accounting can benefit small business borrowers, but that the information contained in third-party credit scores and obtained through ongoing banking relationships can substitute for the incremental information provided by accrual accounting. ABSTRACT:We examine whether more sophisticated accounting methods (in the form of accrual accounting) interacts with other information sources and the pledging of collateral to reduce information asymmetries between small business borrowers and lenders, thereby lowering borrowers' probability of loan denial and cost of debt. We find that higher third party credit scores, but not the use of accrual accounting, decrease the likelihood of loan denial. However, firms using accrual accounting exhibit statistically lower interest rates after controlling for many factors associated with the cost of debt. Further, third-party credit scores and information obtained through ongoing banking relationships appear to substitute for the incremental information from accrual accounting, with the benefits from accruals decreasing in the firm's credit score and relationship length. We find little evidence that any of the alternative information sources influence loan decisions when collateral is pledged, consistent with theories that collateral provides an alternative means for addressing information asymmetry problems. Finally, our results indicate that borrower characteristics such as the firm's age and legal liability further moderate the relations between the various information sources and interest rates.

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Section: Accounting-based Lendingmentioning

confidence: 99%

Alternative information sources and information asymmetry reduction: Evidence from small business debt

Cassar

Ittner

Cavalluzzo³

2015

Journal of Accounting and Economics

143

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“…This information can be prepared using cash or accrual accounting. 4 Much of the accounting literature assumes that accrual accounting is more informative than cash accounting, and surveys find that small business lenders rate accrual accounting their preferred source of financial information for decision-making (Baker and Cunningham, 1993;AICPA, 2004).…”

Section: Accounting-based Lendingmentioning

confidence: 99%

Alternative Information Sources and Information Asymmetry Reduction: Evidence from Small Business Debt

2010

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“…To measure similar economic events in inconsistent ways, depending on the nature of the company and its financial statement users, would create confusion (Kelley, 1976;Stanga and Tiller, 1983) and have a detrimental impact on comparability (Nair and Rittenberg, 1983). It should also be noted that lenders, a primary user of private company financial statements, have often expressed support for requiring one set of GAAP for all businesses regardless of size or type (e.g., see Abdel-Khalik, Collins, Shields, Snowball, Stephens, and Wragge, 1983;Robert Morris & Associates, 1985;Baker and Cunningham, 1993;and AcSB, 2007).…”

Section: Background and Prior Researchmentioning

confidence: 99%

“…A third area of research has looked at the effect of differing accounting standards on decision making or decision processes of financial statement users. It has been found that earnings per share, deferred income tax, and inflation-adjusted information do not appear to be used in small business lending decisions, but that capitalized lease information is used (Campbell, 1984); use of the cost versus equity reporting of investee companies affects lending decisions (Wilkins and Zimmer, 1985); use of tax-basis accounting rather than GAAP affects perceptions of risk, usefulness of the report, confidence in the financial report, and the need for additional information (Coker and Hayes, 1992;Baker and Cunningham, 1993); and prospective versus retroactive implementation of the postretirement benefits standard by small businesses affected loan officers' loan decisions (Ivancevich, Ivancevich, Cocco, and Hermanson, 1997).…”

Section: Background and Prior Researchmentioning

confidence: 99%

Financial Reporting for Private Companies: The Canadian Experience*

Rennie

Senkow

2009

Accounting Perspectives

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The issue of whether small and /or private companies should be allowed to use simplified accounting standards in financial reports has concerned the accounting profession for decades. It has been argued that preparing financial reports in accordance with the large volume of promulgated standards contained in generally accepted accounting principles (GAAP), some of which are relatively complex, has put a significant strain on the resources of small / private business. Moreover, information produced and presented in accordance with at least some accounting standards within GAAP may not be relevant for the users of small /private companies' financial statements.In this paper we look at differential reporting in Canadian GAAP, which gives nonpublicly accountable enterprises the ability to opt out of certain CICA Handbook requirements with unanimous consent of the shareholders. We look at lobbying activity in response to the proposed differential reporting standard and at nonpublicly accountable company experience with the differential reporting opportunity in the period since the standard was promulgated. InFoRmATIon FInAnCIèRE ET soCIéTés FERméEs : l'ExPéRIEnCE CAnAdIEnnE RésuméLa question de savoir s'il devrait être permis aux petites entreprises et (ou) aux sociétés fermées de faire usage de normes comptables simplifiées dans leurs rapports financiers préoccupe la profession comptable depuis des décennies. À l'appui de cette simplification a été invoqué le fait que la préparation des rapports financiers conformément aux multiples normes établies que renferment les principes comptables généralement reconnus (PCGR), dont certaines sont relativement complexes, grève sensiblement les ressources des petites entreprises et des sociétés fermées. De plus, l'information produite et présentée en conformité avec au moins certaines des normes comptables contenues dans les PCGR risque de ne pas être pertinente pour les utilisateurs des états financiers des petites entreprises et des sociétés fermées.

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Effects of Small Business Accounting Bases and Accountant Service Levels on Loan Officer Decisions

Cited by 7 publications

References 5 publications

Alternative information sources and information asymmetry reduction: Evidence from small business debt

Alternative information sources and information asymmetry reduction: Evidence from small business debt

Alternative Information Sources and Information Asymmetry Reduction: Evidence from Small Business Debt

Financial Reporting for Private Companies: The Canadian Experience*

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