Bank loan approval standards and firms’ accounting conservatism: Evidence from China

We examine the correlation between bank loan approval standards and accounting conservatism. Using the bank loan approval index in the People's Bank of China as measure of loan standard, we show that accounting conservatism improves when bank loan approval standards are tightened. We then conduct further tests to address the endogeneity and robustness, yielding highly consistent results. Finally, both ownership and the banking connection significantly moderate the relationship between bank loan approval standards and accounting conservatism. Our findings provide policy implications on controlling loan approval standards, which may effectively reduce credit risks and promote accounting conservatism.