Supply Chain Lending and Accounting Conservatism

Economic interdependence between suppliers and customers generates proprietary information useful for credit risk assessment. Such proprietary information can mitigate information asymmetry between borrowers and lenders, and substitutes for conservative accounting numbers in debt contracting. We hypothesize that a pre-existing lending relationship with a borrower’s customer(s) grants the lender access to proprietary supply-chain information and reduces the lender’s demand for, and therefore the supply of, accounting conservatism by the borrowing supplier. Consistently, we document a negative effect of the pre-existing lendercustomer lending relationship on the borrowing suppliers’ accounting conservatism at loan origination. This negative effect is robust to instrumental variable estimation, propensity score matching approach, and a placebo test. Further, this negative effect becomes stronger when the suppliers and customers operate in an opaque information environment, when the customers represent important business partners and have long-lasting relationship with their lenders, and when the suppliers extend sizeable trade credit to their customers. In additional analysis, we find less use of accounting-based covenants when lenders have a pre-existing lending relationship with the borrower’s customer(s). Our findings demonstrate the informational value of proprietary supply-chain information for lenders and its impact on borrowers’ reporting practices.