The Effect of Governance and Corporate Social Performance on Lending Judgment and Decision

Abstract

The objective of the paper is to examine the effect of governance strength on the lenders’ overall risk assessment judgment and their lending decision. It also examines whether the Corporate Social Performance (CSP) of a firm can moderate lenders’ judgment about the firms’ overall risk and decision making. This study adopts a 2x2 full factorial experimental approach to investigate the relationship. As board-related governance reforms are seen to be more frequently considered by regulators as a way to increase confidence about the reliability of the financial statement, this study assumes that it will also be an important factor of consideration for lenders for approving loan assessments. Study results show that board governance strength does not affect the loan assessment significantly, but Corporate Social Performance has a significant effect on loan assessment. So, given the board strength scenario, the subjects’ loan assessment is affected by borrowers' CSP information. As a result, the corporate social image has a significant influence on lenders' creditworthiness assessment. It is concluded from the results that corporate social performance information of the borrower has more effect on loan assessment then governance strength.