EFFECTS OF DISCLOSURE AND REPORTING ON THE NUMBER OF LOANS IN THE LAST FIVE YEARS IN THE UK BANKING SYSTEM
Course FINA1109-Quantitative Finance Research
Effects of Disclosure and Reporting on the Number of Loans in the Last Five Years in the UK Banking System
Chapter 1: Introduction
1A. Introduction and Background Information
Loans from financial intuitions play a key role in any economy. Kolapo, Oke, and Olaniyan (2019) demonstrated a link between lending and economic growth asserting that more borrowing increases investment and consumption which boosts the country’s gross domestic product (GDP). On the contrary, reduced borrowing reduces investment lowering GDP. Based on this relationship, it is essential for any country to encourage investors and individual household borrowing (Kolapo, Oke, and Olaniyan, 2019). The UK is a developed economy committed to ensuring that its citizens can access loans and credits as an approach to boosting economic growth. According to Fatouh, Markose, and Giansante (2019), increasing the number of bank loans is among the top priorities for the UK economy.
However, the level of borrowing is low in the UK. A recent survey shows that 17.5 per cent of the UK lenders said that credit card and mortgage borrowing declined significantly in 2019, the highest percentage since 2010 (Jackson, 2019). According to Jackson (2019), about 7.2% of the lenders involved in the survey said that loan applications from households, small businesses, and big corporations decreased significantly in 2019. Further report sows that UK consumer borrowing fell from 7.2% to 6.6% in 2019, the weakest level since 2014 (Chu, 2019). Similarly, mortgage borrowing also continues to decline as sown in figure 1.
One of the financial policies the UK adopted to encourage individual households and investors borrowing is information disclosure and reporting by all financial institutions (Gebhardt and Novotny-Farkas, 2018). The policy is based on International Financial Reporting Standards (IFRSs) and International Accounting Standards (IASs) which require all financial firms to disclose their accounting policies, cash flow statements, liabilities, retained earnings, and equity in shareholders (Dhankar, 2019). Other information includes profit and loss, balance sheets, and continuing operations. The essence of the policy is to ensure transparency and enable prospective investors and borrowers to decide whether or not to invest or borrow from a certain firm.
1B. Problem Statement
Despite this policy, the level of borrowing or the number of loans in the UK financial intuitions is still low (Pilbeam, 2018). Moreover, most of the existing studies on this topic focus on the importance of policy on transparency in financing (Ertan, Loumioti, and Wittenberg‐Moerman, 2017), customer confidence when borrowing, and risks assessment by investors (Lennox, Schmidt, and Thompson, 2018), and also inform shareholders about firm’s performance. Remarkably, the area of the impact of disclosure and reporting is understudied; hence, the need for further study on this topic. Moreover, no study on this topic has been carried out in the UK. Therefore, the prospective study will extend the study on the significance of disclosure and reporting by focusing its impact on the number of loans in the UK banking system.
1C. Research Aims
The objectives of the suggested study are threefold. First, the researcher intends to assess how information disclosure and reporting by financial institutions affect borrower decision-making. Secondly, the study seeks to explore the extent to which information disclosure and reporting by financial institutions enhance lender transparency and accountability. Finally, the researcher will investigate the relevance of accounting information disclosure on assessing lender credibility.
1D. Research Questions
The researcher seeks to answer these questions:
1. To what extent do information disclosure and reporting enhance lender transparency and accountability?
2. How do information disclosure and reporting affect borrowers’ decision-making process?
3. What is the relevance of accounting information disclosure on examining lender credibility?
1E. Significance of the Study
Loans play an important role in any economy by boosting consumer purchase power and investment. As a result, the government ought to make policies that encourage individuals and investors to borrow loans from financial institutions. The accounting information disclosure and reporting policy were enacted to encourage transparency in financial institutions as a way of encouraging borrowing. However, the policy seems not working in this regard as the number of loans in the UK continues declining. Despite that there are other possible causes of this decline the suggested study will offer key insight into the impact of this policy on the number of loans.
1F. Structure of the Study
The study will comprise six chapters. After the introduction, the subsequent chapter is a literature review on existing studies related to this topic. The next chapter is the research methodology outlining the desired research methods for this dissertation. The fourth chapter will be data analysis and findings followed by the discussion and, finally, conclusion and recommendations chapter.
Chapter 2: Literature Review
Influence of Accounting Information Disclosure and Reporting on Borrower Decision-Making
Roychowdhury, Shroff, and Verdi (2019) established that people prefer borrowing from lenders with low interest and trusted by many people. As such, they concluded that financial institution accounting disclosure and reporting information is useful in borrower decision-making (Roychowdhury, Shroff, and Verdi, 2019). Christensen, Nikolaev, and Wittenberg‐Moerman (2016) pointed that offering borrowers information such as interest rate and transaction charges helps them make informed decisions whether to borrow from a particular institution or not.
In a contrasting study, Deno, Loy, and Homburg (2019) found that disclosure and accounting have a negligible influence on borrower decisions as most of them do not access such information; hence, they rely on their relationships and trust on lenders. However, publicizing annual financing reports might induce borrowers to take loans from a particular institution as they perceive them as stable and trustworthy. Christensen, Nikolaev, and Wittenberg‐Moerman (2016) added that most borrowers do not rely on such information since they doubt its validity. Christensen, Nikolaev, and Wittenberg‐Moerman (2016) further noted that borrowers prefer partial disclosure with only information on interest rates and assurance that such rates will not change before the end of the repayment period.
In another study, Jones, Melis, Gaia, and Aresu (2018) established that displaying accounting information such as cash flow and earnings might portray a lender as exploitative thereby discouraging prospective borrowers. The only information most borrowers request is the breakdown of interests and charges for them to decide whether or not to take a loan. However, Nikolaev (2017) asserts that having such information enables borrowers to confidently converse with lenders and ask questions regarding interest rates and loan choices making informed choices and decisions. Chava, Huang, and Johnson (2018) also argued that although the information is unverifiable individual borrowing decisions can greatly be influenced by uninformative content.
Impact of Disclosure and Reporting on Lender Transparency and Accountability
De Villiers, Unerman, and Rinaldi (2014) in their recent study on the impact of disclosure and reporting on perceived financial institutions transparency established that borrowers perceive institutions that publish their financial reports quarterly, semi-annually, or annually as transparent, trustworthy, and accountable. From a different perspective, Cooper and Owen (2007) pointed out that such information should be relevant to loans as most people feel that corporate earnings do not reflect its transparency and accountability.
Concurrently, Weil, Fung, Graham, and Fagotto (2006) noted that the disclosure policy does not emphasize data related to loans; hence, such information does not significantly influence borrowers to the view of lenders transparency and accountability. Landsman (2007) also asserts that the policy enhances transparency and accountability to prevent exploitation of shareholders and task evasion by financial institutions but safeguarding borrower interests. Fung, Graham, and Weil (2007) pointed that although the disclosed and reported might not be verifiable it shows that a financial institution complies with government policies; thus, accountable, transparent, and trustworthy.
The relevance of Accounting Information Disclosure on Assessing Lender Credibility
Credibility is important in the process of lender evaluation. However, researchers hold diverse views on the usability of such data by borrowers. Schneider’s (2018) recent study on this topic found that a firm’s disclosure of non-verifiable private information to borrowers and investors helps in assessing the truthfulness of its voluntary disclosure. As such, they concluded that disclosure and reporting enhance corporate credibility from borrowers’ perspective. However, Iatridis (2008) argued that the policy apparently assumed that firm non-verifiable forecasts and other forward-looking reports lacked credibility and that firm private incentives were not sufficient to avoid manipulation. Iatridis (2008) concluded that such information does not foster credibility but an avenue for financial institutions to lure unsuspecting borrowers to take loans which they later fail to pay.
Conclusion and Literature Gap
Literature review presents mixed findings regarding the impact of disclosure and reporting policy on the number of loans. While some point that the policy boosts lender credibility, transparency, and aids in borrower decision-making, others feel that such information is unverifiable and does not contain information related to loans; hence, as a negligible impact on borrower decision whether or not to take loans. Additionally, no research has extensively focused on the UK.
Hypothesis 1a: Information disclosure will be positively related to lender transparency and accountability to an extent that disclosing more financial accounting information to prospective borrowers will increase the perceived lender transparency and accountability, hence, increasing loan borrowing.
Hypothesis 1b: Information disclosure will be negatively related to lender transparency and accountability to an extent that disclosing more financial accounting information to prospective borrowers will decrease the perceived lender transparency and accountability, hence, decreased loan borrowing.
Hypothesis 2a: Information disclosure will be positively related to increased borrowing which is attributed to informed borrowers’ decision-making
Hypothesis 2b: Information disclosure will be negatively related to increased borrowing which is attributed to informed borrowers’ decision-making
Hypothesis 3a: Information disclosure will be positively related to perceived lender credibility to an extent that disclosure of accounting information increases lender credibility, hence, increased loan borrowing
Hypothesis 3b: Information disclosure will be negatively related to perceived lender credibility to an extent that disclosure of accounting information decreases lender credibility, hence, low loan borrowing.
Chapter 3: Research Methodology
The method used in this study will be a questionnaire to assess how disclosure and reporting affect the number of loans. Notably, there are other factors that influence the individual decision whether to take a loan or not. Therefore, using other methods such as surveys and interviews might not capture borrower views in-depth. Afolayan and Oniyinde (2019) support the use of questionnaires as the researcher can include all the necessary information. Moreover, questionnaires help to save time and ensure the relevancy of all the data gathered.
The study will be conducted in the UK. Based on a literature review, no study has been undertaken in this country on the impact of disclosure and reporting on the number of loans. Remarkably, the UK is one of the countries that implemented this but its influence on borrower decisions has not been explored.
Population and Sampling Technique
The target population is London residents and financial institutions. The residents will be people aged over 18 years currently with loans or have ever borrowed loans from any financial institution over the last five years in the UK. Such people will be involved on the basis that they understand the financial information they required or sought before taking the loan. On the other hand, financial institutions will include banks. The sample size will be 36 people selected using a purposive sampling method from various public places including coffee shops, grocery stores, and schools and chosen across the city 12 banks chosen through a simple random sampling method. Only people with loans or already paid will be involved in the study. Sharma (2017) recommends the use of purposive sampling technique to save time by ensuring that only those with information relevant to this study partake in this research. However, purposive sampling is criticized for encouraging biased sampling since people are denied equal chances of participating in the study compared to a simple random sampling approach.
Prospective respondents will be approached and requested to take part in the study. Data will be collected in the UK between February and March this year after approval of the research proposal. Prospective participants will be informed about the purpose of the study and assured of the privacy and confidentiality of their shared data (Lo, Grotevant, and McRoy, 2019). After they agree, the researcher will personally issue them a questionnaire and allow 20-30 minutes to complete the questionnaire and return for analysis.
Data Analysis Method
Quantitative data will be analysed using OLS with time series. In this case, the data will not be randomly sample but obtained over a specific period. Statistics Solutions (2013) recommends the use of this data analysis technique when a researcher wants to know whether the independent variable predicts the dependent variable or not. Accounting information disclosure and reporting is the independent variable while the number of loans is the independent variable. The regression equation used will be as follows: y = b1*x + c; where y is the projected dependent variable, c is the constant, b regression coefficient while x is the independent variable. The researcher will employ F-test to examine whether or not the independent variables foretell the dependent variable as recommended by Guo et al. (2019). Finally, the t-test will be deployed to measure the significance of the predictor.
The limitation of this study is associated with the time series data that will be used in this study. As noted by XXXX, there are probable biased standard errors correlated over time. That is, if errors occur today, they might occur again in the subsequent periods. Moreover, the effects might take time to appear. In other words, it is difficult to know the duration to wait to see the effects. For instance, the effects of interest rate cut or disclosure to borrowers might take time to influence mortgage borrowing. Therefore, the data used might not give real picture of the image of the policy.
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