Lenders’ Response to Peer and Customer Restatements

Abstract

We investigate whether restatements announced by economically related firms influence the contract terms a borrower receives from lenders. A restatement by a major customer firm increases the loan spread of a borrower by 11 basis points, on average. The contagion effects of customer restatements are higher (45 basis points) when a borrower's switching costs are high. Restatements by peer firms in the same industry also increase a borrower's loan spread, and this increase occurs regardless of restatement severity. Moreover, the sensitivity of loan spread to peer restatements is significantly greater when the restating peer firms are also in the bank's lending portfolio, suggesting that a lender's personal experience with restatements in an industry makes it more attuned to the potential implications of these restatements for the borrowing firm. Finally, our results suggest that lenders utilize information from peer restatements to anticipate future restatements by the borrowing firm.

How Do Auditors Respond to FCPA Risk?

“…These findings suggest that auditors focus on FCPA risk less when foreign operations make up a smaller portion of client operations. While this approach may seem rational from a materiality perspective, auditors should note that regulators are not required to prove materiality or even intent as they pursue FCPA violations (Ebright 2016). We also investigate auditor turnover and audit reporting lag (length of time between the date on the auditor's report and the fiscal year-end date) as additional ways that auditors may respond to FCPA risk.…”

Real earnings management and loan contract terms

“…Costello and Wittenberg-Moerman (2011), Dhaliwal, Hogan, Trezevant, and Wilkins (2011 find that borrowers disclosing internal control weaknesses incur stricter debt contract terms, and lenders reduce their reliance on accounting numbers in debt contracting with these borrowers. Similarly, borrowers restating their financial reports are subject to less favourable debt contract terms (Chen, 2016;Files & Gurun, 2018;Graham et al, 2008;Park & Wu, 2009). Some other research documents that debt contracting is also affected by the borrower's earnings predictability (Hasan et al, 2012), financial statement comparability (Fang et al, 2016), and the ability of the borrower's accounting numbers to capture credit-quality deterioration in a timely fashion (Ball et al, 2008).…”

Empirical Analysis of Customer Risk and Corporate Financing Constraints Based on Supply Chain Networks

“…Firstly, the customer risk degree will affect their ability to perform contracts and increase the commercial credit period and bad-debt losses on accounts receivable. When the customer's operating performance declines, its ability and willingness to observe the contract decrease [20,21]. It, in turn, affects the capital turnover efficiency of suppliers, leading to a cash flow crisis and raising credit risk.…”