The Effect of Governance on Credit Decisions and Perceptions of Reporting Reliability

We conduct an experiment to examine how lending decisions are affected by lender perceptions of reporting and governance quality. We perform a set of experiments to determine whether lenders are sensitive to the quality of governance as measured by board composition along multiple dimensions, whether their perceptions of reporting reliability are a function of the strength of the board, and whether their lending decisions are then affected by their perceptions of reporting reliability. Study participants are a group of 62 professional lenders from Singapore, with at least three years of professional credit analysis and lending experience. We find that lenders are primarily sensitive to financial condition and the perceived reliability of financial reporting. While we also find that lenders are sensitive to board strength, further tests suggest lenders appear particularly sensitive to board strength only for relatively highperforming firms. We also find that the perceived reliability of the financial reports does not appear to be affected by board strength or by the applicant's financial condition. The paper discusses implications for policy making, practice, and research. [ABSTRACT FROM AUTHOR] Copyright of Behavioral Research in Accounting is the property of American Accounting Association