Trade-Off between Hard and Soft Information in Bank Lending

While the role of accounting information in debt contract design has been extensively studied, accounting's role in determining firms' likelihood of getting loans from potential lenders is relatively less explored. Focusing on the syndicated loan market, this paper investigates the extent to which lending decisions of lead banks incorporate trade-offs between access to a borrower's soft, internal information and the quality of the borrower's financial accounting information. Building on substantial finance and economics literature, this study uses the geographic distance between the borrower and the lead bank as a proxy for the bank's access to soft information acquisition. Prior research finds that the more distant the borrower is from the bank, the more difficult it is for the bank to obtain soft information for monitoring. This paper documents that the distance between the borrower and the lead bank increases with the quality of accounting information, suggesting that lead banks viewing high quality accounting information as a substitute for internal information. Further, this trade-off between accounting information and soft information is amplified for borrowers with more opaque information environments. Finally, it is documented that for borrowers without a high-reputation bank located in their geographic area, higher quality accounting information increases the probability that a borrower transacts with a geographically remote reputable lead bank. Overall, the results suggest that the availability of high-quality accounting information increases the set of potential contracting counterparties by creating the opportunity for borrowers to transcend the limits of geography and seek lending relationships with geographically remote banks.