Does sound lending infrastructure foster better financial reporting quality of SMEs?

Huang, X. ORCID: https://orcid.org/0000-0003-4531-3070, Wang, X., Han, L. ORCID: https://orcid.org/0000-0002-2778-3338 and Laker, B. ORCID: https://orcid.org/0000-0003-0850-9744 (2023) Does sound lending infrastructure foster better financial reporting quality of SMEs? European Journal of Finance, 29 (5). pp. 542-566. ISSN 1466-4364 doi: 10.1080/1351847X.2022.2075281

Abstract/Summary

Using an unbalanced panel dataset that contains financial information of 46,340 small and medium-sized enterprises (SMEs) across 11 European countries over 2007 to 2015, this study examines the impacts of soundness of institutional factors on SME financial reporting quality as (inversely) reflected by the degree of earnings management. We consider a comprehensive framework of country-level lending infrastructure proxies which includes information, legal, social and regulatory environments and show that SME financial reporting quality is better in economies where there is greater availability, depth and quality of credit information sharing between lenders and credit reporting service providers, as empirically shown by a lower level of earnings management. We also show that a well-established legal system, i.e., better judicial and bankruptcy protection systems, is effective in restraining SME earnings management incentives and, earnings management is less prevalent in economies that are subject to a higher stock of social capital which increases SME borrowing capacity. Furthermore, we find that the stringent tax and regulatory systems can foster better financial reporting quality, as earnings management may be less effective. Overall, our robust findings suggest that the soundness of country-level lending infrastructure plays a vital role in improving SME financial reporting quality.

Item Type	Article
URI	https://reading-clone.eprints-hosting.org/id/eprint/104981
Identification Number/DOI	10.1080/1351847X.2022.2075281
Refereed	Yes
Divisions	Henley Business School > Finance and Accounting Henley Business School > Leadership, Organisations, Behaviour and Reputation
Publisher	Taylor and Francis
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