Corporate Misreporting and Bank Loan Contracting
John R. Graham
Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER)
Wilfrid Laurier University - School of Business & Economics
McMaster University - Michael G. DeGroote School of Business
Journal of Financial Economics, Forthcoming
This paper is the first to study the effect of financial restatement on bank loan contracting. Compared with loans initiated before restatement, loans initiated after restatement have significantly higher spreads, shorter maturities, higher likelihood of being secured, and more covenant restrictions. The increase in loan spread is significantly larger for fraudulent restating firms than other restating firms. We also find that after restatement, the number of lenders per loan declines and firms pay higher upfront and annual fees. These results are consistent with the view that banks use tighter loan contract terms to overcome risk and information problems arising from financial restatements.
Number of Pages in PDF File: 57
Keywords: Corporate misreporting, financial restatement, corporate fraud, bank loans, financial contracting, cost of debt
JEL Classification: G21, G32, K22, K42Accepted Paper Series
Date posted: December 21, 2006
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