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Lenders' Response to Restatements Along the Supply Chain

Rebecca Files

University of Texas at Dallas

Umit G. Gurun

University of Texas at Dallas

March 1, 2014

We investigate whether restatements announced by economically related firms influence the contract terms a borrower receives from lenders. Peer restatements increase a borrower’s loan spread by seven to 16 basis points, with lenders reacting more strongly to fraudulent restatements. Restatements in a major supplier industry increase the loan spread of the borrower and debt covenants are tightened in response to both peer and supplier restatements. We find minimal evidence that customer restatements impact contract terms. The contagion effects we document cannot be explained by future changes to a borrower’s credit risk, suggesting that lenders overreact to restatements along the supply chain.

Number of Pages in PDF File: 65

Keywords: Restatements, Bank Loans, Contagion Effects, Supply Chain

JEL Classification: G10, G34, L82

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Date posted: July 9, 2010 ; Last revised: March 3, 2014

Suggested Citation

Files, Rebecca and Gurun, Umit G., Lenders' Response to Restatements Along the Supply Chain (March 1, 2014). Available at SSRN: http://ssrn.com/abstract=1636862 or http://dx.doi.org/10.2139/ssrn.1636862

Contact Information

Rebecca Files
University of Texas at Dallas ( email )
P.O. Box 830688
Richardson, TX 75083-0688
United States
Umit G. Gurun (Contact Author)
University of Texas at Dallas
2601 North Floyd Road
Richardson, TX 75083
United States
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