Working Paper: NBER ID: w13708
Authors: John R. Graham; Si Li; Jiaping Qiu
Abstract: This paper is the first to study the effect of financial restatement on bank loan contracting. Compared with loans initiated before restatement, loans initiated after restatement have significantly higher spreads, shorter maturities, higher likelihood of being secured, and more covenant restrictions. The increase in loan spread is significantly larger for fraudulent restating firms than other restating firms. We also find that after restatement, the number of lenders per loan declines and firms pay higher upfront and annual fees. These results are consistent with the view that banks use tighter loan contract terms to overcome risk and information problems arising from financial restatements.
Keywords: financial restatement; bank loan contracting; loan spreads; covenant restrictions
JEL Codes: G21; G32; K22; K42
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Financial restatements (G32) | Higher loan spreads (G19) |
| Financial restatements (G32) | Shorter maturities (G19) |
| Financial restatements (G32) | Higher likelihood of being secured (G51) |
| Financial restatements (G32) | More covenant restrictions (R21) |
| Fraudulent restatements (M48) | Higher loan spreads (G19) |
| Financial restatements (G32) | Higher transaction costs (D23) |
| Financial restatements (G32) | Lost investment opportunities (G11) |
| Financial restatements (G32) | Decrease in number of lenders per loan (G21) |
| Financial restatements (G32) | Higher upfront and annual fees (G19) |
| Financial restatements (G32) | Tighter loan contract terms (G21) |
| Financial restatements (G32) | Higher costs of borrowing (G21) |