Lenders' Response to Restatements Along the Supply Chain
University of Texas at Dallas
Umit G. Gurun
University of Texas at Dallas - Naveen Jindal School of Management
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
Date posted: July 9, 2010 ; Last revised: March 3, 2014
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