Loan Sales and Borrowers' Accounting Conservatism

We examine whether initial loan sales in the secondary loan market relate to borrowing firms’ accounting conservatism. We find that borrowing firms exhibit a significant decline in accounting conservatism after the initial loan sales. We show that the decline in borrower conservatism is more pronounced for firms borrowing from lenders with lower monitoring incentive and for firms with lower incentive to supply conservatism. The baseline results are robust to a battery of sensitivity tests. Collectively, we provide corroborative evidence that lead lenders’ monitoring incentive is a mechanism through which accounting conservatism is enforced in the private debt market, and that lead lenders play a more prominent role than secondary loan market participants in shaping corporate (conservative) reporting.