Economic Growth and Financial Statement Verification |
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Authors: | PETRO LISOWSKY MICHAEL MINNIS ANDREW SUTHERLAND |
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Institution: | 1. University of Illinois at Urbana‐Champaign and Norwegian Center for Taxation;2. University of Chicago Booth School of Business;3. Massachusetts Institute of Technology Sloan School of Management |
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Abstract: | We use a proprietary data set of financial statements collected by banks to examine whether economic growth is related to the use of financial statement verification in debt financing. Exploiting the distinct economic growth and contraction patterns of the construction industry over the years 2002–2011, our estimates reveal that banks reduced their collection of unqualified audited financial statements from construction firms at nearly twice the rate of firms in other industries during the housing boom period before 2008. This reduction was most severe in the regions that experienced the most significant construction growth. These trends reversed during the subsequent housing crisis in 2008–2011 when construction activity contracted. Moreover, using bank‐ and firm‐level data, we find a strong negative (positive) relation between audited financial statements during the growth period, and subsequent loan losses (construction firm survival) during the contraction period. Collectively, our results reveal that macroeconomic fluctuations produce temporal shifts in the overall level of financial statement verification and temporal shifts in verification are related to bank loan portfolio quality and borrower performance. |
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Keywords: | D82 E32 E44 G21 M40 economic growth commercial lending banks financial crisis audit verification financial statements lending standards |
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