Lenders’ Response to Peer and Customer Restatements

40 Pages Posted: 9 Jul 2010 Last revised: 15 Nov 2016

Rebecca Files

University of Texas at Dallas

Umit G. Gurun

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: November 1, 2016

Abstract

We investigate whether restatements announced by economically related firms influence the contract terms a borrower receives from lenders. A restatement by a major customer firm increases the loan spread of a borrower by 11 basis points, on average. The contagion effects of customer restatements are higher (45 basis points) when a borrower’s switching costs are high. Restatements by peer firms in the same industry also increase a borrower’s loan spread, and this increase occurs regardless of restatement severity. Moreover, the sensitivity of loan spread to peer restatements is significantly greater when the restating peer firms are also in the bank’s lending portfolio, suggesting that a lender’s personal experience with restatements in an industry makes it more attuned to the potential implications of these restatements for the borrowing firm. Finally, our results suggest that lenders utilize information from peer restatements to anticipate future restatements by the borrowing firm.

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

JEL Classification: G10, G34, L82

Suggested Citation

Files, Rebecca and Gurun, Umit G., Lenders’ Response to Peer and Customer Restatements (November 1, 2016). Available at SSRN: https://ssrn.com/abstract=1636862 or http://dx.doi.org/10.2139/ssrn.1636862

Rebecca Files

University of Texas at Dallas ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

Umit G. Gurun (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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