How does delegated main bank monitoring substitute for accounting information in the bond market?

Abstract

While prior studies suggest a substitutive relationship between bank monitoring with private information and stakeholders’ use of public accounting information, they do not clarify the specific content of the substituted accounting information. We examine whether and how main bank monitoring with private information affects the use of accounting information by bondholders in the Japanese bond market. First, consistent with prior studies, we find that the explanatory power of accounting information is generally lower for firms with a main bank, especially when the firm’s default risk is high. This suggests that the delegation of monitoring to the main bank occurs. Second, we find that bond investors of firms without a main bank place more importance on accounting information that is highly relevant to firm’s debt repayment ability, such as interest and discount payments, allowance for loan losses, or cash flows from operations. This suggests that the bank monitoring with private information substitutes for these accounting items.