Two Essays on Debt Market, Corporate Bankruptcy, and the Financial Reporting of Borrowers

Abstract

Essay1: Spillover Effects of Bankruptcy on Voluntary Disclosure

This study examines the spillover effects of bankruptcy on the voluntary disclosure of firms that share common lenders with bankrupt firms. I argue that after firms in a bank's loan portfolio file for bankruptcy, the monitoring ability of the bank will be perceived to be lower, leading other investors to rely less on bank monitoring and demand more public information disclosure from the non-bankrupt borrowers of the bank (the monitoring channel). Furthermore, following large bankruptcies, the lending ability of a bank will decrease, reducing the credit availability to its non-bankrupt borrowers, which in turn leads the non-bankrupt borrowers to increase voluntary disclosure to obtain other sources of financing (the financing channel). Consistent with my expectation, I find that after firms in a bank's loan portfolio file for bankruptcy, the non-bankrupt borrowers of the bank issue more voluntary 8-K filings, include more exhibits in voluntary 8-K filings and increase the length of their 8-K filings. A series of analyses suggest that this effect is stronger when shareholders of the non-bankrupt borrowers delegate more monitoring to banks, and when bankruptcies lead to a greater increase in the non-bankrupt borrowers' incentive to access alternative financing sources. My findings suggest that corporate bankruptcy has broader implications for information production in capital markets and extends beyond the bankrupt firm to other firms sharing the same lender.

Abstract of Essay 2 Essay2: Does Bank Reputation Affects How Investors Perceive Borrowers' Reporting Credibility?

This study examines whether bank reputation affects the perceived credibility of borrowers' financial reporting. Using large bankruptcies in banks' loan portfolios as a proxy for bank reputation damage, I find that the reputation damage of a bank leads to a significant decline in the earnings response coefficients (ERCs) of its borrowers in the subsequent six months. The effect of bank reputation damage on ERCs is weaker when there are alternative mechanisms to monitor borrowers and when investors have lower reliance on bank monitoring. Overall, my findings suggest that damage to banks' reputations leads investors to question the credibility of borrowers' financial reporting, which in turn results