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The Dynamics of Borrower Reputation Following Financial Misreporting

Management Science, Forthcoming

42 Pages Posted: 29 Feb 2012 Last revised: 10 Nov 2016

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business

Kershen Huang

Bentley University

Shane A. Johnson

Texas A&M University - Department of Finance

Date Written: July 26, 2016

Abstract

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

Chava, Sudheer and Huang, Kershen and Johnson, Shane A., The Dynamics of Borrower Reputation Following Financial Misreporting (July 26, 2016). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2012691 or http://dx.doi.org/10.2139/ssrn.2012691

Sudheer Chava

Georgia Institute of Technology - Scheller College of Business ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States

HOME PAGE: http://www.prism.gatech.edu/~schava6/

Kershen Huang

Bentley University ( email )

175 Forest Street
Waltham, MA 02452
United States
781.891.2296 (Phone)
781.891.2896 (Fax)

HOME PAGE: http://sites.google.com/site/kershenhuang/

Shane Johnson (Contact Author)

Texas A&M University - Department of Finance ( email )

Mays School of Business
College Station, TX 77843-4218
United States
979-862-3318 (Phone)

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