Accounting Information and Risk Shifting with Asymmetrically Informed Creditors

47 Pages Posted: 19 Feb 2021

See all articles by Tim Baldenius

Tim Baldenius

Columbia Buiness School

Mingcherng Deng

City University of New York (CUNY) - Baruch College

Jing Li

The University of Hong Kong - Faculty of Business and Economics

Date Written: December 17, 2020

Abstract

This paper explores the effects of public information (e.g., accounting earnings) in a competitive lending setting where the borrower can engage in risk shifting. If a privately informed "inside" creditor bids against outsider creditors, public information levels the playing field with nontrivial effects on bidding and risk-shifting. A perfect public signal would yield the least efficient outcome: introducing some measurement noise alleviates risk shifting by subjecting the outsider to the winner's curse. However, for pessimistic priors about the borrower, greater precision can alleviate risk shifting, locally. We derive conditions under which greater signal precision lowers the probability of creditor turnover and discuss implications for financial reporting regulations along the business cycle.

Keywords: Asset substitution, relationship lending, creditor turnover, accounting information

JEL Classification: G20, G32, M41

Suggested Citation

Baldenius, Tim and Deng, Mingcherng and Li, Jing, Accounting Information and Risk Shifting with Asymmetrically Informed Creditors (December 17, 2020). Available at SSRN: https://ssrn.com/abstract=3750846 or http://dx.doi.org/10.2139/ssrn.3750846

Tim Baldenius

Columbia Buiness School ( email )

3022 Broadway
New York, NY 10027
United States

Mingcherng Deng

City University of New York (CUNY) - Baruch College ( email )

One Bernard Baruch Way, Box B12-225
New York, NY 10010
United States

Jing Li (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
51
Abstract Views
302
rank
460,681
PlumX Metrics