Lenders’ Response to Peer and Customer Restatements
42 Pages Posted: 9 Jul 2010 Last revised: 20 Jul 2018
Date Written: March 23, 2017
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: Suggested Citation