Do Corporate Whistleblower Laws Affect Bank Loan Contracting?
53 Pages Posted: 6 Jan 2022 Last revised: 24 Jan 2022
Date Written: January 5, 2022
Abstract
We employ a generalized difference-in-differences analysis that exploits the staggered adoptions of state False Claims Acts (FCAs) to examine the implications of state whistleblower laws for bank loan contracting terms. We find that loan interest spreads are significantly reduced after firms are exposed to state general FCAs relative to firms not exposed to state general FCAs. We also find significant reductions in the number of general covenants, the number of financial covenants, and the probability of collateral requirement after firms are exposed to state general FCAs. To shed light on potential mechanisms, we provide evidence that financial reporting quality and audit quality increase after firms are exposed to state whistleblower laws. We also find that riskier firms exhibit a larger reduction in loan cost following exposure to state general FCAs. Overall, our findings suggest that whistleblower laws reduce firms’ cost of debt financing.
Keywords: Whistleblower Laws, False Claims Act (FCA), Bank Loan Contracting Terms
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