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The Dynamics of Borrower Reputation Following Financial Misreporting

Author

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  • Sudheer Chava

    (Scheller College of Business, Georgia Institute of Technology, Atlanta, Georgia 30308)

  • Kershen Huang

    (McCallum School of Business, Bentley University, Waltham, Massachusetts 02452)

  • Shane A. Johnson

    (Mays Business School, Texas A&M University, College Station, Texas 77843)

Abstract

We study the dynamics of borrower reputation in bank loan markets following revelations of financial misreporting by the borrower. Misreporting firms pay greater loan spreads than matched firms for at least six years following revelation of the misreporting, and there is no evidence of a downward trend in the misreporting premium. Following revelation, misreporting firms are more likely to engage in various actions to potentially rebuild their reputations, but even firms that engage in multiple actions continue to pay greater loan spreads for at least six years. Our results suggest that misreporting causes long-lasting and costly reputation losses that firms find very difficult or prohibitively costly to restore.

Suggested Citation

  • Sudheer Chava & Kershen Huang & Shane A. Johnson, 2018. "The Dynamics of Borrower Reputation Following Financial Misreporting," Management Science, INFORMS, vol. 64(10), pages 4775-4797, October.
    • Handle: RePEc:inm:ormnsc:v:64:y:2018:i:10:p:4775-4797
    DOI: 10.287/mnsc.2017.2739
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