The Impact of Bank Financing on Borrowers’ Voluntary Disclosures and Real Investments

This paper examines how an increase in bank lending affects firms’ investment disclosures and policies. Exploiting the unconventional liquidity injections by the European Central Bank in 2011–2012, we find that U.S. borrowers of European Union (EU) banks receive greater bank financing and issue more management capital expenditure (capex) forecasts following the liquidity injections. In contrast, we find no evidence of changes in bond financing or issuance of management earnings forecasts. We also find that EU banks’ U.S. borrowers on average receive negative market reactions to their capex forecasts and make no change in investment following the liquidity injection. Further, relative to firms with positive feedback, firms with negative feedback have a lower increase in investment but a higher increase in financial assets. Additionally, we find that the effect of increased bank lending on management capex forecasts is more pronounced among banks with weaker financial conditions and among borrowers with greater financial constraints, higher growth volatility, and more informed trading. These findings highlight the important role of capex forecasts in seeking market feedback following increased bank lending and suggest that market feedback helps explain why the transmission of bank credit to corporate investment did not occur following the liquidity injections. This paper was accepted by Suraj Srinivasan, accounting. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.00528 .