Lenders’ Response to Peer and Customer Restatements
University of Texas at Dallas
Umit G. Gurun
University of Texas at Dallas - Naveen Jindal School of Management
July 15, 2015
We investigate whether restatements announced by economically related firms influence the contract terms a borrower receives from lenders. A restatement by major customer firm increases the loan spread of a borrower by 11 basis points. The contagion effects of customer restatements are higher (45 basis points) when a borrower’s switching costs are high. Peer restatements also increase a borrower’s loan spread, with lenders reacting more strongly to restatements related to revenue recognition issues. The sensitivity of loan spread to peer restatements is also significantly greater when the restating peer firms are also in the bank’s lending portfolio, suggesting that a lender’s personal experience with restatements in an industry makes its more attuned to the potential implications of these restatements for the borrowing firm. Moreover, our results suggest that lenders utilize information from peer restatements to anticipate future restatements by the borrowing firm.
Number of Pages in PDF File: 66
Keywords: Restatements, Bank Loans, Contagion Effects, Supply Chain
JEL Classification: G10, G34, L82
Date posted: July 9, 2010 ; Last revised: July 21, 2015
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