The impact of the new OHADA accounting system on the judgments and decisions of Cameroonian bankers

Cameroon and 15 other African States belonging to the Organization for the Harmonization of Business Law in Africa (OHADA) adopted the Uniform Act Organizing and Harmonizing Undertakings' Accounting Systems on March 23, 2000, which scuttled the OCAM accounting plan in favor of the new OHADA accounting system (SYSCOHADA). Companies were required to adopt SYSCOHADA for company accounts and consolidated accounts beginning on January 1, 2001, and January 1, 2002, respectively. The goal of this study is to compare the impact of the presentation format and informational content of both accounting systems on the judgments and decisions of bankers, and, more specifically, to find out whether the information contributed by SYSCOHADA has changed the judgments and decisions bankers made under the old OCAM accounting plan. To that effect, a field experiment was conducted with Cameroonian bankers using a within-subjects design. Significant differences were noted in bankers' underlying judgments (operating income, net income, cash flow, leverage, liquidity, and ability to raise capital) as well as in their initial judgments about profitability and financial structure. Conversely, no significant differences were noted with respect to other judgments and decisions, i.e. principal judgments about the overall risk rating and overall risk trend, the loan decision, and the interest rate to charge (risk premium). Further, the new statement of sources and applications of funds (SSAF) influenced their underlying judgments about operating income, leverage, liquidity, and ability to raise capital, as well as their initial judgments about financial structure.     

The Effects of Information and Cognitive Processes on Decision Making

This article examines the efficacy of a two-stage cognitive model of decision making within the context of loan decisions. A covariance structural analysis of the cognitive processes that loan officers and MBA students used to reach loan decisions was examined through measures designed to test the proposed two-stage processing model. The results indicated that, during the first stage of cognitive processing, conceptually-driven and data-driven perceptual biases caused different assessments of loan information. The results also indicated that judgments made during the second phase of processing significantly affected decision choice. The well documented conservatism bias was also evident in the results. The result was that experienced loan officers did not out-perform novice students on most of the loan decisions. The relative usefulness of the two-stage model is discussed and general suggestions for future decision making research are offered.     

Integrating Credit Models Using Accounting Information With Loan Officers' Decision Processes

This paper focuses on loan officers' cognitive processes of problem detection and problem-hypothesis formulation, which are incorporated into a credit model when they are confronted with loan decisions. Prior credit models in banking have not directly addressed loan officers' internal processes in a loan situation. The integration of both loan officers' cognitive processes and information used in a credit model can better help explain their decision-making biases. The results presented in this paper showed that information derived from a credit model influences loan officers' problem detection and problem-hypothesis formulation, and these processes are important factors in their loan approval. To identify loan officers' decision-making processes, the approach used in this paper integrates principles from financial management, economics, and cognitive psychology with methodological developments from psychometrics and econometrics.     

Information Losses in a Dynamic Model of Credit

This paper examines dynamic information losses associated with loan terminations. We assume that the aggregated returns of current borrowers contain information about the mean returns to future borrowers. In a competitive loan market, the value of this information is not fully internalized by individual borrowers and lenders, and loan decisions fail to be first best. Introducing heterogeneous borrowers, who know their own risk characteristics better than lenders, safer borrowers are less willing to borrow when risk premia rise. As they cease borrowing, the information generated in credit markets becomes noisier and this tends to increase risk premia. The model produces alternating and persistent periods of “tight” and “loose” credit.     

The Informational Role of the Media in Private Lending

We investigate whether a borrower's media coverage influences the syndicated loan origination and participation decisions of informationally disadvantaged lenders, loan syndicate structures, and interest spreads. In syndicated loan deals, information asymmetries can exist between lenders that have a relationship with a borrower and less informed, nonrelationship lenders competing to serve as lead arranger on a syndicated loan, and also between lead arrangers and less informed syndicate participants. Theory suggests that the aggressiveness with which less informed lenders compete for a loan deal increases in the sentiment of public information signals about a borrower. We extend this theory to syndicated loans and hypothesize that the likelihood of less informed lenders serving as the lead arranger or joining a loan syndicate is increasing in the sentiment of media‐initiated, borrower‐specific articles published prior to loan origination. We find that as media sentiment increases (1) outside, nonrelationship lenders have a higher probability of originating loans; (2) syndicate participants are less likely to have a previous relationship with the borrower or lead bank; (3) lead banks retain a lower percentage of loans; and (4) loan spreads decrease.     

The Informational Efficiency of the Equity Market As Compared to the Syndicated Bank Loan Market

The loan market is a hybrid between a public and a private market, comprised of financial institutions with access to private information about borrowing firms. We test whether this is reflected in informationally efficient price formation in the loan market vis-a-vis the equity markets, and reject this private information hypothesis. We also reject a liquidity hypothesis which suggests that equity markets always lead loan markets, despite bank lenders' access to private information, because of greater liquidity in equity markets. We further test, and reject, an asymmetric price reaction hypothesis that states that loan returns are more sensitive to negative information whereas equity returns respond symmetrically to both positive and negative information. We find evidence most consistent with an integrated markets hypothesis that suggests that both the equity and syndicated bank loan markets are highly integrated such that information flows freely across markets. This is particularly true when the equity market makers are also loan syndicate members.      

Financial Restatements, Cost of Debt and Information Spillover: Evidence From the Secondary Loan Market

Abstract:  In this paper, we investigate the effect of financial restatements on the debt market. Specifically, we focus on the secondary loan market, which has become one of the largest capital markets in the US, and ask the following: (1) whether financial restatements increase restating firm's cost of debt financing and (2) whether the information about restatements arrives at the secondary loan market earlier than at the stock market? Using 176 restatement data, we find significant negative abnormal loan returns and increased bid-ask spreads around restatement announcements. Furthermore, this negative loan market reaction is more pronounced when the restatement is initiated by either the SEC or auditors, and when the primary reason for restatement is related to revenue recognition issues. Additionally, we find restatement information arrives at the secondary loan market earlier than at the equity market, and that such private information quickly flows into the equity market. We also show that stock prices begin to decline approximately 30 days prior to the restatement announcements for firms with traded loans. However, we do not find such informational leakage for firms without traded loans. Collectively, the results of this paper suggest: (1) increased cost of debt financing after restatements and (2) superior informational efficiency of the secondary loan market to the stock market.     

Screening soft information: evidence from loan officers

I evaluate how loan officers screen uncodified, soft information using data from China. After documenting substantial differences in loan decisions and outcomes across loan officers, I develop and estimate a screening model incorporating screening ability and beliefs regarding ability. Estimates imply that the typical loan officer is risk-averse, has heterogeneous screening ability, and behaves overconfidently—behaving as if he or she observes more from soft information than what the data would indicate. However, I still find that loan officers offer value over benchmarks that ignore soft information. Counterfactuals on compensation, loan assignment, and training further explore the limits of screening.     

THE INFORMATIONAL ROLE OF BANK LOAN RATINGS

We analyze the relatively new phenomenon of credit ratings on syndicated loans, asking first whether they convey information to the capital markets. Our event studies show that initial loan ratings and upgrades are not informative, but downgrades are. The market anticipates downgrades to some extent, however. We also examine whether public information reflecting borrower default characteristics explains cross‐sectional variation in loan ratings and find that ratings are only partially predictable. Our evidence suggests that loan and bond ratings are not determined by the same model. Finally, we estimate a credit spread model incorporating bank loan ratings and other factors reflecting default risk, information asymmetry, and agency problems. We find that ratings are related to loan rates, given the effect of other influences on yields, suggesting that ratings provide information not reflected in financial information. Ratings may capture idiosyncratic information about recovery rates, as each of the agencies claims, or information about default prospects not available to the market.     

The Cascade Effect on Lending Conditions: Evidence from the Syndicated Loan Market

This paper investigates, both theoretically and empirically, how interactions among potential lenders may influence contract terms via informational cascade in the syndicated loan market. Our model shows that the ex‐post observed interest rate is higher and the probability of syndication failure is lower when potential lenders can only observe the decisions of their predecessors versus when they can freely communicate with each other. Empirical tests confirm the model's predictions and the existence of a cascade effect on lending conditions. Using relational distance to proxy for the segmentation of communication, we find that relational distance is positively related to the loan spread and the requirements for collateral and guarantees, but negatively related to the probability of syndication failure.     

Information content and recency effect of the audit report in loan rating decisions

We examined the significance of the audit report in loan rating decisions using the belief revision model. We designed a laboratory experiment where the sign of the audit report is mixed with other annual financial information in a series of sequential evidence. The results of an experimental design, using 106 loan officers from international financial institutions, support the hypothesis that the qualified audit report appears to be an independent and useful piece of evidence when it is contrary to favourable financial expectations. Our findings also support that the ‘recency effect’ might influence international commercial loan officers’ perception of the qualified audit report.     

Applying portfolio theory to global bank lending

Portfolio theory provides some insights into how a bank should manage its global exposures. Practical application of some of the principles of portfolio analysis is possible if comparable credit ratings are available and if the impact on each loan's rating of likely future events can be assessed. If further restrictive assumptions are made about which quality dimensions of the portfolio are more important (and how much more important), and if judgements can be quantified about what risk-return tradeoffs are acceptable, then it is possible to derive measures to guide exposure and pricing decisions. This article is related to the other papers in this special issue in that country and corporate risk assessment methodologies can provide important inputs into the portfolio analysis. This paper, however, attempts to go beyond the evaluation of risk at the level of individual companies, countries, or other loan customers, and to focus instead on the problem of managing the riskiness of the overall bank loan portfolio.     

框架效应与贷款决策:一项金融素养的实验研究

过度借贷是一个常见的非理性决策。近年来,网络借贷市场的激烈竞争降低了申请贷款门槛,导致金融素养较低的人群开始参与网络借贷,进一步加剧了过度借贷现象。本文采用实验室实验方法,给被试者提供本质上完全等价的贷款产品,同时外生地变化贷款成本形式(绝对数值形式的利息相比于百分数形式的利率、单期利率相比于多期复利),研究贷款成本的展示形式对贷款意愿是否存在影响。结果表明,相比于月利率,展示月利息使得被试者的贷款接受率显著上升21.3个百分点;相比于年化复利,展示月利率使得被试者的贷款接受率显著上升7.91个百分点。这两种框架效应可分别由金融素养的知识层面和思维层面所解释。本文对网络小额贷款场景下的过度借贷提出了一种新的解释——贷款成本的框架效应,并采用实验经济学方法对此提供了可靠的证据。本文研究结论提示,加强金融教育和制定相关法规双措并举,有助于人们做出更审慎的贷款决策。     

The Pricing of Sequential Bank Loans

The theory of financial intermediation assigns banks a unique role in the resolution of information asymmetry. Banks, in general, obtain private information about the borrower and the project during the screening of loan applicants and during the monitoring of loan recipients. Incumbent banks, in particular, utilize information obtained while monitoring previous loan extensions to resolve information asymmetry when granting subsequent loans. We examine the rate on a sequence of loans to a borrower and find that the incumbent bank information advantage has finite magnitude and is quickly reflected in the pricing of the second loan. We also find that the lending relationship does not deteriorate to the detriment of the borrower. This study also provides further evidence supporting the hypothesis that an incumbent bank resolves information asymmetry during the monitoring of loan extensions.     

A Neural Network Approach for Analyzing Small Business Lending Decisions

In this paper, we apply the neural network method to small business lending decisions. We use the neural network to classify the loan applications into the groups of acceptance or rejection, and compare the model results with the actual decisions made by loan officers. Data were collected from a leading bank in Central New York. The sample contains important financial statement and business information of borrowers and the loan officers' decisions. We conduct the network training on the data sample and find that the neural network has a stronger discriminating power for classifying the acceptance and rejection groups than traditional parametric and nonparametric classifiers. The results show that the neural network model has a high predictive ability. Our findings suggest that neural networks can be a very useful tool for enhancing small-business lending decisions and reducing loan processing time and costs.     

Sovereign Debt: Optimal Contract,Underinvestment, and Forgiveness

In this paper we develop a time consistent rational expectations model which analyzes the equilibrium loan contract between a borrowing country and a foreign bank. The loan contract specifies both the amount of the loan and the promised interest payments, and rationally reflects the investment decisions of the country and the possibilities of renegotiation and repudiation of the debt. An important feature of the model is that at the initial negotiation of the loan there is uncertainty about whether the country will renegotiate for partial forgiveness in the future, and whether it will eventually repudiate the debt, even having successfully renegotiated. Moreover, the probabilities of renegotiation and repudiation, and the amount of possible forgiveness are endogenously determined. In the model the repudiation decision is directly related to the underinvestment problem; the objective of the renegotiation is precisely to alleviate this problem. The model is used to analyze the effects of four variables on both the optimal contract and the country's welfare: the degree of penalties that a bank can impose on a defaulting country, the uncertainty of production, the productivity of investments and the riskless interest rate. The analysis has policy implications as well as testable predictions.     

The effect of a potential borrower's reporting reputation and financial condition on commercial loan officers' estimates of forecast bias and subsequent loan recommendations

This paper investigates whether a potential borrower's reporting reputation and financial condition affect commercial loan officers' loan judgments and recommendations after receiving an earnings forecast that predicts improved financial performance. The results suggest that the earnings forecast is perceived as more credible in the presence of (1) a reputation for objective reporting, and (2) strong financial condition. Also, a reputation for objective reporting allowed the borrower to more credibly convey the expected improvement in performance when financial condition was weak. However, while financial condition predictably affects loan recommendations (likelihood of granting the loan, interest rate), reporting reputation does not. While we find that commercial loan officers discount forecasts under similar circumstances as stock analysts, results suggest that the consequences of developing a reputation for aggressive reporting (e.g., aggressive selection of accounting methods and estimates within GAAP) may be greater in a stock valuation setting (prior research documents lower stock prices) than in a loan setting.     

Institutional investment in online business lending markets

We provide new insights into the business lending decisions of institutional investors in online credit markets by benchmarking their lending performance against that of retail investors.We find superior performance for loans financed by institutional investors, although large sized retail investor groups achieve equivalent performance. Lending decisions of institutional investors are not default risk minimising, and we quantify lending inefficiencies. From a platform perspective, we show that (i) the platform-administered loan allocation process is not biased in favour of institutional investors, (ii) institutional participation in the retail marketplace is not a distorting factor in loan performance, and (iii) the platform’s move to a fixed rate system had detrimental effects on loan outcomes for institutional investors. The superior loan performance achieved by institutional investors is confined to the auction period, when institutional investors had autonomy over setting interest rates.