Strategic Information Disclosure and Bank Lending

Abstract

We study private firms’ strategic disclosure of financial statements in shaping bank lending decisions and structuring debt contracts in informationally opaque credit markets. Using a unique dataset of loan applications by small businesses to a large bank, we document that the availability of financial statement disclosures by small businesses increases their credit access. Results from debt contract design analyses based on details of booked loans document that such disclosures are significant in pricing loans and in determining collateral requirements, as well as influencing the bank’s ex post monitoring of loan performance. For all these analyses, we also use a staggered regulatory change across states, in disclosure requirements for publicly held companies, as an exogenous shock, and demonstrate the impact on various aspects of small business lending due to private firms’ disclosure choices in response to such disclosure externalities from the public sector.