Where Were the Banks? The Relation between Financial Statement Misreporting and Firms' Bank Debt Use
41 Pages Posted: 8 Mar 2008
Date Written: March 3, 2008
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
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