Lenders' Response to Restatements Along the Supply Chain

Abstract:     
We investigate whether financial restatements announced by peer firms, suppliers, or customers influence the interest rate and non-spread contract terms (e.g., covenants) a borrower receives from lenders. A restatement by a peer firm (within the same industry) increases a borrower’s loan spread by an average of five basis points, after controlling for other known sources of credit risk. Restatements in a major customer industry also increase the loan spread of the borrowing firm by seven basis points, while supplier restatements impact loan spread only in the most severe cases. In addition, debt covenants are tightened in response to peer and supplier restatements. Finally, we find evidence of contagion effects in the private debt market that cannot be explained by future changes to a borrower’s credit risk, which suggests that lenders overreact to restatements along the supply chain and tighten loan spreads unnecessarily.

Number of Pages in PDF File: 57

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

JEL Classification: G10, G34, L82

working papers series