The Impact of Restatements on Bank Loans: Evidence from the Supply Chain The Impact of Restatements on Bank Loans: Evidence from the Supply Chain

Abstract

ABSTRACT: We investigate whether financial restatements announced by peer firms, suppliers, or customers influence the interest rate a borrower receives from lenders. A restatement by a peer firm (within the same industry) increases a borrower"s loan spread by an average of six basis points, after controlling for other factors including firm size, leverage, and default risk. This effect becomes more pronounced if the borrower operates in a relatively non-concentrated industry or the peer restatement involves revenue recognition issues. Restatements announced in a major customer industry also increase the loan spread of the borrowing firm by seven basis points, while supplier restatements impact loan spread only in the most severe cases. We are the first to document that restatements influence the loan contracting terms of other (non-restating) firms. Our results also shed light on the extent to which lenders utilize information from along the supply chain when setting contract terms. JEL Classification: G10, G34, L8