Information asymmetries and debt financing: New evidence from the 2007-2008 financial crisis

Journal title FINANCIAL REPORTING
Author/s Andrea Bafundi, Claudia Imperatore
Publishing Year 2023 Issue 2023/2
Language English Pages 34 P. 5-38 File size 221 KB
DOI 10.3280/FR2023-002001
DOI is like a bar code for intellectual property: to have more infomation click here

Below, you can see the article first page

If you want to buy this article in PDF format, you can do it, following the instructions to buy download credits

Article preview

FrancoAngeli is member of Publishers International Linking Association, Inc (PILA), a not-for-profit association which run the CrossRef service enabling links to and from online scholarly content.

Purpose: Focusing on the 2007-2009 financial crisis, this study investigates how firms’ and debtholders’ information sensitivity jointly shape corporate debt financing. According to the pecking order theory, opaque firms prefer bank loans over more information-sensitive sources like bonds and equity. When external conditions worsen, firms face difficulties accessing bank loans and look for alter-natives. Yet, as bondholders are more information-sensitive than banks, the substi-tution effect may not occur especially for firms with lower financial reporting qual-ity (FRQ). Design/methodology/approach: A matching difference-in-differences ap-proach is used to compare the debt financing of firms with and without access to corporate bond markets before and after the onset of the financial crisis. A sample of quarterly data of US-listed firms is analyzed for the 2006Q3-2009Q2 period. Findings: The reduction in debt financing due to the crisis was greater for firms with access to bond markets. The effect is more pronounced for firms with lower FRQ. These firms also looked more for alternatives such as equity and cash re-sources.

Keywords: information asymmetries, financial crisis, debt financing, financial re-porting quality.

Jel codes: D53, D81, E41, F34

  1. Adrian T., Paolo C. and Hyun S.S. (2013). Which Financial Frictions? Parsing the Evidence from the Financial Crisis of 2007 to 2009. NBER Macroeconomics Annual, 27, pp. 159-214, DOI: 10.1086/669176
  2. Almeida H. and Campello M. (2007). Financial Constraints, Asset Tangibility, and Corporate Investment. The Review of Financial Studies, 20(5), pp. 1429-1460. -- http://www.jstor.org/stable/4494809.
  3. Almeida H., Campello M., Laranjeira B. and Weisbenner S. (2012). Corporate Debt Maturity and the Real Effects of the 2007 Credit Crisis. Critical Finance Review, 1(1), pp. 3-58, DOI: 10.1561/104.00000001
  4. Altman E.I. (1968). Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy. The Journal of Finance, 23(4), pp. 589-609, DOI: 10.2307/2978933
  5. Balakrishnan K., Watts R. and Zuo L. (2016). The Effect of Accounting Conservatism on Corporate Investment during the Global Financial Crisis. Journal of Business Finance & Accounting, 43(5-6), pp. 513-542,
  6. Becker B., Bos M. and Roszbach K. (2020). Bad Times, Good Credit. Journal of Money, Credit and Banking, 52, pp. 107-142,
  7. Becker B. and Ivashina V. (2014). Cyclicality of credit supply: Firm level evidence. Journal of Monetary Economics, 62, pp. 76-93.
  8. Bharath S.T., Sunder J. and Sunder S.V. (2008). Accounting Quality and Debt Contracting. The Accounting Review, 83(1), pp. 1-28. -- http://www.jstor.org/stable/30243509.
  9. Bolton P. and Freixas X. (2000). Equity, Bonds, and Bank Debt: Capital Structure and Financial Market Equilibrium under Asymmetric Information. Journal of Political Economy, 108(2), pp. 324-351, DOI: 10.1086/262121
  10. Bolton P., Freixas X., Gambacorta L. and Mistrulli P.E. (2016). Relationship and Transaction Lending in a Crisis. The Review of Financial Studies, 29(10), pp. 2643-2676,
  11. Caballero R.J. and Krishnamurthy A. (2008). Collective Risk Management in a Flight to Quality Episode. The Journal of Finance, 63(5), pp. 2195-2230,
  12. Campello M., Graham J.R. and Harvey C. R. (2010). The real effects of financial constraints: Evidence from a financial crisis. Journal of Financial Economics, 97(3), pp. 470-487,
  13. Carvalho D., Ferreira M.A. and Matos P. (2015). Lending Relationships and the Effect of Bank Distress: Evidence from the 2007-2009 Financial Crisis. Journal of Financial and Quantitative Analysis, 50(6), pp. 1165-1197, DOI: 10.1017/S0022109015000551
  14. Chang X., Dasgupta S. and Hilary G. (2009). The Effect of Auditor Quality on Financing Decisions. The Accounting Review, 84(4), pp. 1085-1117,
  15. Chava S. and Purnanandam A. (2011). The effect of banking crisis on bank-dependent borrowers. Journal of Financial Economics, 99(1), pp. 116-135,
  16. Choe H., Masulis R.W. and Nanda V. (1993). Common stock offerings across the business cycle: Theory and evidence. Journal of Empirical Finance, 1(1), pp. 3-31, DOI: 10.1016/0927-5398(93)90003-A
  17. Claessens S., Kose M.A. and Terrones M. E. (2012). How do business and financial cycles interact?. Journal of International Economics, 87(1), pp. 178-190,
  18. Çolak G., Durnev A. and Qian Y. (2017). Political Uncertainty and IPO Activity: Evidence from U.S. Gubernatorial Elections. Journal of Financial and Quantitative Analysis, 52(6), pp. 2523-2564,
  19. De Haas R. and Van Horen N. (2013). Running for the Exit? International Bank Lending During a Financial Crisis. The Review of Financial Studies, 26(1), pp. 244-285,
  20. Dechow P.M. and Dichev I. D. (2002). The Quality of Accruals and Earnings: The Role of Accrual Estimation Errors. The Accounting Review, 77(s-1), pp. 35-59,
  21. Dell’Ariccia G. and Marquez R. (2006). Lending Booms and Lending Standards. The Journal of Finance, 61(5), pp. 2511-2546,
  22. Demerjian P., Lev B. and McVay S. (2012). Quantifying Managerial Ability: A New Measure and Validity Tests. Management Science, 58(7), pp. 1229-1248. -- http://www.jstor.org/stable/41499554.
  23. Duchin R., Ozbas O. and Sensoy B.A. (2010). Costly external finance, corporate investment, and the subprime mortgage credit crisis. Journal of Financial Economics, 97(3), pp. 418-435. -- https://EconPapers.repec.org/RePEc:eee:jfinec:v:97:y:2010:i:3:p:418-435.
  24. Easton P.D., Monahan S.J. and Vasvari F.P. (2009). Initial Evidence on the Role of Accounting Earnings in the Bond Market. Journal of Accounting Research, 47(3), pp. 721-766. -- http://www.jstor.org/stable/25548039.
  25. Erel I., Julio B., Kim W. and Weisbach M.S. (2011). Macroeconomic Conditions and Capital Raising. The Review of Financial Studies, 25(2), pp. 341-376,
  26. Florou A. and Kosi U. (2015). Does mandatory IFRS adoption facilitate debt financing?. Review of Accounting Studies, 20(4), pp. 1407-1456,
  27. Francis B., Hasan I. and Wu Q. (2013). The Benefits of Conservative Accounting to Shareholders: Evidence from the Financial Crisis. Accounting Horizons, 27(2), pp. 319-346,
  28. Francis J., LaFond R., Olsson P.M. and Schipper K. (2004). Costs of Equity and Earnings Attributes. The Accounting Review, 79(4), pp. 967-1010,
  29. Guerrieri V. and Shimer R. (2014). Dynamic Adverse Selection: A Theory of Illiquidity, Fire Sales, and Flight to Quality. The American Economic Review, 104(7), pp. 1875-1908. -- http://www.jstor.org/stable/42920874.
  30. Gunn J.L., Khurana I.K. and Stein S.E. (2018). Determinants and consequences of timely asset impairments during the financial crisis. Journal of Business Finance & Accounting, 45(1-2), pp. 3-39,
  31. Huber K. (2018). Disentangling the Effects of a Banking Crisis: Evidence from German Firms and Counties. American Economic Review, 108(3), pp. 868-898,
  32. Ivashina V. and Scharfstein D. (2010). Bank lending during the financial crisis of 2008. Journal of Financial Economics, 97(3), pp. 319-338,
  33. Jones J.J. (1991). Earnings Management During Import Relief Investigations. Journal of Accounting Research, 29(2), pp. 193-228, DOI: 10.2307/2491047
  34. Kahle K.M. and Stulz R. (2013). Access to capital, investment, and the financial crisis. Journal of Financial Economics, 110(2), pp. 280-299. -- https://EconPapers.repec.org/RePEc:eee:jfinec:v:110:y:2013:i:2:p:280-299.
  35. Kothari S.P., Leone A.J. and Wasley C.E. (2005). Performance matched discretionary accrual measures. Journal of Accounting and Economics, 39(1), pp. 163-197,
  36. Lang M. and Maffett M. (2011). Transparency and liquidity uncertainty in crisis periods. Journal of Accounting and Economics, 52(2), pp. 101-125,
  37. Leary M.T. (2009). Bank Loan Supply, Lender Choice, and Corporate Capital Structure. The Journal of Finance, 64(3), pp. 1143-1185,
  38. Leary M.T. and Roberts M.R. (2005). Do Firms Rebalance Their Capital Structures?. The Journal of Finance, 60(6), pp. 2575-2619,
  39. Lemmon M. and Roberts M.R. (2010). The Response of Corporate Financing and Investment to Changes in the Supply of Credit. The Journal of Financial and Quantitative Analysis, 45(3), pp. 555-587. -- http://www.jstor.org/stable/ 40930468.
  40. Lisowsky P.M., Micahel and Sutherland A. (2017). Economic Growth and Financial Statement Verification. Journal of Accounting Research, 55(4), pp. 745-794, DOI: 10.1111/1475-679X.12165
  41. Mishkin F.S. (2011). Over the Cliff: From the Subprime to the Global Financial Crisis. Journal of Economic Perspectives, 25(1), pp. 49-70,
  42. Myers S.C. and Majluf N.S. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), pp. 187-221, DOI: 10.1016/0304-405X(84)90023-0
  43. Naranjo P., Saavedra D. and Verdi R.S. (2020). The Pecking Order and Financing Decisions: Evidence From Changes to Financial-Reporting Regulation. Journal of Accounting, Auditing & Finance, 0(0),
  44. Ng J. (2011). The effect of information quality on liquidity risk. Journal of Accounting and Economics, 52(2), pp. 126-143,
  45. Petacchi R. (2015). Information asymmetry and capital structure: Evidence from regulation FD. Journal of Accounting and Economics, 59(2), pp. 143-162,
  46. Ruckes M. (2004). Bank Competition and Credit Standards. The Review of Financial Studies, 17(4), pp. 1073-1102,
  47. Sadka R. (2006). Momentum and post-earnings-announcement drift anomalies: The role of liquidity risk. Journal of Financial Economics, 80(2), pp. 309-349,
  48. Santos J.A.C. (2006). Why firm access to the bond market differs over the business cycle: A theory and some evidence. Journal of Banking & Finance, 30(10), pp. 2715-2736,
  49. Shakespeare C. (2020). Reporting matters: the real effects of financial reporting on investing and financing decisions. Accounting and Business Research, 50(5), pp. 425-442, DOI: 10.1080/00014788.2020.1770928
  50. Shivakumar L., Urcan O., Vasvari F.P. and Zhang L. (2011). The debt market relevance of management earnings forecasts: evidence from before and during the credit crisis. Review of Accounting Studies, 16(3), 464,
  51. Stiglitz J.E. and Weiss A. (1981). Credit Rationing in Markets with Imperfect Information. The American Economic Review, 71(3), pp. 393-410. -- http://www.jstor.org/stable/1802787.
  52. Vayanos D. (2004). Flight to Quality, Flight to Liquidity, and the Pricing of Risk -- (https://EconPapers.repec.org/RePEc:nbr:nberwo:10327.
  53. Zhang Y. (2020). Conditional conservatism and trade credit during the global financial crisis. Journal of Accounting and Public Policy, 39(4), 106728,

Andrea Bafundi, Claudia Imperatore, Information asymmetries and debt financing: New evidence from the 2007-2008 financial crisis in "FINANCIAL REPORTING" 2/2023, pp 5-38, DOI: 10.3280/FR2023-002001