Financial contracting literature argues that banks have significant access to private information about firms’ operating performance and utilize this information to create optimal contracts. Accrual of new information about the firm, such as changes in investment opportunities, credit quality, and macroeconomic conditions, contributes to the determination of contractual terms. In this paper, we investigate whether lenders also utilize unexpected changes in the accounting reporting systems (i.e., financial restatements) of suppliers, customers, and peer firms when setting private loan spreads. Specifically, we explore how financial restatements within an industry and along the supply chain impact the contract terms of a borrower.
The number of financial restatements has grown rapidly since 1997 and has received considerable attention from regulators, investors, and the financial press. An established stream of literature has explored the various consequences to restating firms, including loss of firm value, increased cost of debt and equity capital, managerial turnover, and regulatory enforcement (Palmrose et al. 2004; Hribar and Jenkins 2004; Desai et al. 2006; Hennes et al. 2008; Graham et al. 2008; Karpoff et al. 2008a,b; Files 2010). The impact of restatements on other (non-restating) firms is less clear, however.
While prior literature has explored the effect of restatements on the stock prices of peer firms (Akhigbe and Madura 2008; Gleason et al. 2008; Goldman et al. 2009), we are the first to explore the potential spillover effects of restatements in the private loan market. As private bank loans are a significant source of capital for U.S. companies, understanding how lenders incorporate restatement information into contract terms is critical. Our analysis of supplier and customer firms also provides a more complete picture of the economic impact of restatements – namely, whether information from restatements is transferred along the supply chain through formal contracts, such as bank loans.
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The Impact of Restatements on Bank Loans: Evidence from the Supply Chain
