Adam Smith Business School

Professor Jochen Bigus, Free University Berlin

"Private Firms’ Earnings Quality in Good and in Bad Times – The Role of Relationship Banking"
Wednesday, 22 May 2024. 12:00-13:30
Room 282, Hot House, Adam Smith Business School & PGT Hub

Abstract

There is mixed empirical evidence on whether close banking relationships are associated with lower or higher earnings quality of borrowing firms. This paper argues that relationship banking allows borrowing firms to conceal true performance in times when the borrowing firm is either doing very well or is financially distressed. When the firm is doing well it might not want to attract competitors’ attention. When the firm is financially distressed, earnings management helps reduce or defer costs of financial distress, e.g., when violating financial covenants with outside creditors.

We have a sample of German private firms that rely heavily on bank financing and are also subject to mandatory financial reporting. The firm’s financial condition is proxied by the Z-Score for private firms. We find that the firms’ earnings quality is generally lower with relationship banking. This negative association is stronger with borrowing firms having high and poor Z-scores. However, with medium-performing firms, relationship banking is not negatively related to earnings quality, in some regressions even positively. Hence, our paper is the first one to document an inverse U-shape association between the firm’s financial condition and the relationship bank’s impact on the firm’s earnings quality.

Bio

After bank traineeship and military service, I studied business administration, economics and sociology in Berlin and Paris. Doctoral degree in corporate finance, Postdoc in Law and Economics at University of Hamburg and University of California , Berkeley. Since 2003 Professor of International Accounting at University of Osnabrück, since 2007 Professor of Financial Accounting at University of Berne (Switzerland), since 2011 Professor of Managerial Accounting at Freie Universität Berlin. Publications in European Accounting Review, Journal of Banking & Finance, Journal of Business Finance and Accounting, but also in law and law and economics journals. Research funding from Swiss Science Foundation, Fritz-Thyssen Foundation, German Research Foundation and European Commission.

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First published: 3 April 2024