Where Were the Banks? The Relation between Financial Statement Misreporting and Firms' Bank Debt Use

41 Pages Posted: 8 Mar 2008

See all articles by Brooke Stanley

Brooke Stanley

Winthrop University

Shane A. Johnson

Texas A&M University - Department of Finance

Date Written: March 3, 2008

Abstract

We compare firms that restate financial statements to firms that do not restate to test the hypotheses that bank monitoring should deter or detect misreporting. For relatively less (more) severe misreporting, we find the likelihood of misreporting is positively related (unrelated) to bank borrowing, and that ex ante changes in bank debt are positive (unrelated) for misreporting firms versus control firms. These results suggest that bank monitoring is insufficient to deter or detect misreporting. Instead, it may provide incentives for managers to engage in relatively less severe misreporting, consistent with the debt covenant hypothesis.

Keywords: Bank loans; misreporting; incentives; financial statements

Suggested Citation

Stanley, Brooke and Johnson, Shane A., Where Were the Banks? The Relation between Financial Statement Misreporting and Firms' Bank Debt Use (March 3, 2008). Available at SSRN: https://ssrn.com/abstract=1101621 or http://dx.doi.org/10.2139/ssrn.1101621

Brooke Stanley

Winthrop University ( email )

Rock Hill, SC 29733-0001
United States

Shane A. Johnson (Contact Author)

Texas A&M University - Department of Finance ( email )

Mays School of Business
College Station, TX 77843-4218
United States
979-862-3318 (Phone)

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