Does Income Smoothing Affect the Cost of Bank Loans?

Abstract

This study investigates the link between income smoothing behavior and the cost of bank loans. From the first analysis, this study finds that income smoothing behavior by management lowers the cost of bank loans. In addition to this first analysis, the current study also focuses on the relationship between the information conveyed through income smoothing and that generated by the bank. In particular, I analyze whether the effect of income smoothing behavior on the cost of bank loans is influenced by the information production function of the main bank. Through the second analysis, the current study provides new empirical evidence. First, when considering the information production role of banks, a statistically significant relation between income smoothing and the cost of bank loans in the firms whose information is less likely to be generated by banks (measured by the firm’s borrowing concentration) can be found. Second, in the firms whose information is more likely to be generated by the banks, a statistically significant relation between income smoothing and the cost of bank loans cannot be observed. These results imply that the information production role of banks affects the link between income smoothing and the cost of bank loans.