When the Glass-Steagall Act was repealed in 1997, banks were once again allowed to engage in cross-selling their services – providing both underwriting and lending services to the same firm. How did cross-selling impact borrowing firms’ financial reporting quality to banks?

Barbara Su finds that cross-selling allows borrowers to provide higher quality accounting data. Su points to two explanations for this finding: the incentive effect and the information effect.

Su concludes that cross-selling offers benefits to both firms and banks. As for banks, they assume less financial risk when they can better evaluate firms. In turn, banks can offer lower interest rates, which will help those firms providing high-quality accounting information to save costs.