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Earnings quality is frequently used as a proxy for information risk in accounting contexts. Following previous literature, we analyse relations between earnings quality and the cost of bank loans in Japan. We hypothesise and test how bank monitoring affects relations between earnings quality and the cost of loans. We find that total earnings quality, innate earnings quality generated from economic fundamentals and discretionary earnings quality driven by managerial discretion over accounting affect the cost of bank loans. We also find that bank monitoring mitigates the effect of discretionary earnings quality on loan pricing. Empirical results support our predictions grounded in information risk and previous banking literature. Introducing bank monitoring into our research confirms and extends previous literature.

Earnings quality; cost of bank loans; bank monitoring