Series: Working Papers. 2238.
Author: Miguel Duro, Germán López-Espinosa, Sergio Mayordomo, Gaizka Ormazabal and María Rodríguez-Moreno.
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Summary
This paper studies firm-level factors shaping the enforcement of financial reporting regulation on private non-financial firms and propose bank lending as a particularly important one. Our tests are based on a rare combination of datasets, which allows us to construct unique measures of misreporting, notably underreporting of debt. We observe that firms with bank debt are more likely to file mandatory financial reports and less likely to file information with irregularities. While we also find evidence that the need for bank financing can induce firms to misreport, this concern is mitigated by additional tests suggesting that banks detect reporting issues at firms’ financial statements. Critically, we observe that firms with reporting issues obtain significantly less credit, especially when the bank has previous exposure to debt misreporting and when the bank verifies debt information using the public credit registry. Collectively, our paper documents important firm-level determinants of private non-financial firms’ misreporting and highlight that banks play a significant role in the enforcement of mandatory financial reporting on these firms.