Lenders’ Response to Peer and Customer Restatements

42 Pages Posted: 9 Jul 2010 Last revised: 20 Jul 2018

See all articles by Rebecca Files

Rebecca Files

University of Texas at Dallas

Umit Gurun

University of Texas at Dallas

Date Written: March 23, 2017

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, Lenders’ Response to Peer and Customer Restatements (March 23, 2017). 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 )

800 West Campbell Road, SM 41
Richardson, TX 75080-3021
United States
9728835818 (Phone)

Umit Gurun (Contact Author)

University of Texas at Dallas ( email )

2601 North Floyd Road
Richardson, TX 75083
United States

HOME PAGE: http://www.umitgurun.com

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