Restatements, Board Interlocks, and Bank Loan Contracting

    Project: Research project

    Project Details


    A financial restatement occurs when a company, either voluntarily or prompted by auditors or regulators, revises public financial information that was previously reported (U.S. General Accounting Office 2002). The number of financial restatement announcements by public companies because of financial reporting frauds and/or accounting errors has significantly increased over time. The high-profile financial restatements by large well- known companies such as Xerox, Enron, and WorldCom have erased billions of dollars of previously reported earnings and shaken investors’ confidence in the credibility of financial reporting. Prior literature documents that restatements have impact not only on the restating firms per se, but also on the economically related firms to the restating firms, such as industry peers, suppliers, and customers. The proposed research aims to extend this stream of literature by examining whether and how a company’s financial restatement has impact on its board-interlocked firms’ loan contracting.

    Two corporate boards are said to be interlocked if a director of one firm sits on the board of the other firm. Board interlock is probably the most direct form of communication of certain accounting practices among firms. As financial restatements may diffuse among board interlocked firms, lenders are expected to adjust borrowers’ loan contracting terms after their interlocked firms announce restatement. The proposed research intends to provide empirical evidence on the following three issues: (1) whether lenders charge higher interest rates and impose more unfavorable nonprice terms after a borrower’s board-interlocked firms announce restatements; (2) whether lenders’ response to interlocked firms’ restatements is conditioned upon the type of financial restatements (irregularity versus errors); (3) whether lenders’ response to interlocked firms’ restatements is conditioned upon the position of interlocked directors (i.e., chairman, CEO, audit committee chair, etc.).

    The proposed research hopes to contribute to the literature in several ways. First, by providing empirical evidence on how interlocked firms’ restatements affect loan contracting terms, the proposed research will help to better understand board interlocks from the perspective of private lenders. Second, the proposed research will contribute to the growing literature that examines the contagion effects of restatements via various economic links. Third, the proposed study will contribute to bank loan literature by investigating whether and how an interlocked firm’s information risk, signaled by financial restatements, is considered by lenders and then affect the borrower’s loan contracting.
    Effective start/end date1/01/1631/12/17


    Explore the research topics touched on by this project. These labels are generated based on the underlying awards/grants. Together they form a unique fingerprint.