Bank privatization and financial statement comparability: a natural experiment in China

Abstract We examine whether banks play a role in shaping firms’ financial statement comparability (F/S comparability). Relying on a difference-in-differences research design, we find that following bank privatization, which substantially strengthens bank monitoring, the F/S comparability of borrowing firms increases. This result holds for both the traditional and the text-analysis based F/S comparability proxies. Economically, the increase accounts for about 3.30 percent of the average level of F/S comparability during our sample period. Further analyses reveal that this positive association is more pronounced in firms with more financial constraints, higher default risk, and less transparent firms. We also find that bank privatization has a stronger impact on borrower F/S comparability when the lenders experience a greater decline in state ownership, or when the lenders are large commercial banks or nation-wide joint equity commercial banks . Moreover, the role of bank privatization in increasing F/S comparability is concentrated in banks with a lower level of digital transformation. Finally, we show that firms acquire more loans when their F/S comparability improves after bank privatization.