The Dynamics of Borrower Reputation Following Financial Misreporting
Management Science, Forthcoming
42 Pages Posted: 29 Feb 2012 Last revised: 10 Nov 2016
Date Written: July 26, 2016
Firms that misreport financial information pay greater spreads on new bank loans for at least six years following restatement of the misreported information, whether benchmarked against their pre-restatement loans or similar loans of matched non-misreporting firms. Misreporting firms are more likely to replace their CEOs and CFOs than are matched firms, but even firms that replace these executives pay greater spreads for at least six years. There is some suggestive evidence that firms that promptly replace the chairs of their audit committees or their external auditors see their loan spreads fall to benchmark levels within three years of restating, but a large majority of misreporting firms do not promptly replace these parties and pay significantly greater spreads for at least six years following their restatements. The results suggest that misreporting causes a long-lasting and costly reputation loss that firms find difficult to restore.
Keywords: Reputation, cost of debt, bank loans, financial restatements, fraud
JEL Classification: G21, G30
Suggested Citation: Suggested Citation