Bank Relationships and the Value Relevance of the Income Statement: Evidence from Income-Statement Conservatism

Authors

  • Wooseok Choi

    Corresponding author
    1. The author is from Korea University, Seoul, Korea. He appreciates helpful comments and suggestions from Joseph Anthony, Marilyn Johnson, Jun-Koo Kang, Tom Linsmeier, Christian Mastilak, Vicent O'Connell, Kathy Petroni, and workshop participants at Michigan State University, Korea University, and the 2003 American Accounting Association Annual Meeting.
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  • He is also grateful to Martin Walker (editor) and an anonymous referee for their constructive suggestions. He acknowledges the financial support provided by Korea University, Michigan State University, and California State University at Los Angeles.

* Address for correspondence: Wooseok Choi, Korea University Business School, Anam-Dong Seongbuk-Gu, Seoul, Korea 136-701. e-mail:
choiw@korea.ac.kr

Abstract

Abstract:  This study examines the effects of a firm's debt financing decision on the informativeness of the income statement. This study specifically examines the association between a firm's bank dependence and the value relevance of the income statement by investigating the income-statement conservatism of firms with bank loans. Focusing on relatively small businesses, this study finds that income-statement conservatism, measured as timely loss recognition, is increasing in a firm's bank dependence. This study also finds that the value relevance of the income statement is increasing in a firm's bank dependence. The findings of this paper suggest that the usefulness of the income statement varies with a firm's bank dependence, indicating that the value relevance of the income statement is a function of a firm's debt financing decision. The findings further suggest that bank relationships affect the value relevance of the income statement through their influence on income-statement conservatism.

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