Business Commons^™

Lenders' Influence On Borrower Firms' Internal Controls, Md Mahmudul Hasan

Open Access Theses & Dissertations

I identify a covenant in commercial loan contracts that requires borrowers to provide lenders internal control-related private information. Lenders use accounting information to monitor loan contracts and reliable accounting information is dependent on effective internal controls of the firm. I argue and provide evidence that lenders are more likely to demand internal control-related private information when borrowers have weak internal controls, when lenders use more accounting information in debt contracts, and when debt contracts have terms that expose lenders to greater risk. I further show that lenders' demand for internal control-related private information is positively associated with improvement in borrower …