Discretionary Accruals in Italian Private Firms and Non-Linear Bank Loan Granting

By | 2017-12-22T10:25:33+01:00 December 6th, 2017|

Mafrolla Elisabetta, Nobili Viola/ Financial ReportingRiviste / Fascicolo: 1-2017

This paper investigates whether and at what extent private firms reduce the quality of their accruals in order to signal a better portrait to the bank and obtain new or larger bank loans. We measure earnings discretionary accruals of a sample of Italian private firms, testing whether new and larger bank loans are associated with a higher (lower) quality of earnings in borrowers’ financial reporting. We study bank loan levels and changes and how they impact discretionary accruals and found that, surprisingly, private firms’ discretionary accruals are systematically positively affected by an increase in bank loans, although they are negatively affected by the credit worthiness rating assigned to the borrowers. We find that the monitoring role of the banking system with regard to the adoption of discretionary accruals is effective only when the loan is very large. This paper may have implications for policy-makers as it contributes to the understanding of the shortcomings of the banking regulatory system. This is an extremely relevant issue since the excessive amount of non-performing loans held by Italian banks recently threatened the stability of the European Banking Union as a whole.

Keywords: Discretionary accruals, private firms, bank loans, non-performing loans, private loans.

Read Article

The Association between Big4 and Cost of Debt in Private Firms

By | 2017-12-22T10:24:25+01:00 December 6th, 2017|

Azzali Stefano, Mazza Tatiana/ Financial ReportingRiviste / Fascicolo: 1-2017

This study investigates the association between choice of a Big4 audit firm and Cost of Debt compared with non-Big4 in Italian firms. Based on a sample of Italian companies audited by an audit firm in the period 2007-2012, we perform OLS regressions to test the Big4 association with Cost of Debt. Results confirm our expectation that audit firm size is a significant criterion of audit firm choice and we find that Big4 is associated with lower Cost of Debt than non-Big4 in private firms. The choice of Big4 audit firm reduce the specific agency conflict between banks and owner/management in private firms. We also find that private firms benefit from lower Cost of Debt than public companies. This research makes a contribution to the literature by extending previous results (Gul et al., 2013, Cano Rodriguez and Alegria, 2012, Karjalainen, 2011) to private firms and to the setting of Italy. Results may also be useful for companies choosing auditors in private firms and in the mitigation of agency conflict.

Keywords: Big4, cost of debt, private firms.

Read Article