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Banks' acquisition of private information about financial misreporting

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Title: Banks' acquisition of private information about financial misreporting
Author(s): Chen, Po-Chang
Director of Research: Abdel-Khalik, A. Rashad
Doctoral Committee Chair(s): Abdel-Khalik, A. Rashad
Doctoral Committee Member(s): Almeida, Heitor; Jackson, Kevin; Narayanamoorthy, Ganapathi S.
Department / Program: Accountancy
Discipline: Accountancy
Degree Granting Institution: University of Illinois at Urbana-Champaign
Degree: Ph.D.
Genre: Dissertation
Subject(s): restatements financial misreporting bank loans private information
Abstract: This study investigates whether banks acquire information about the borrowing firms’ subsequent financial restatements during the misreporting period, a period in which firms issue misstated financial reports. Finance theory suggests that banks have superior ability in gathering and processing information. In this paper, I test whether banks respond to financial misreporting by their client firms before this malpractice becomes known to the public. I find that bank loans initiated to restating firms during the misreporting period have significantly higher interest spreads, more restrictive financial covenants, and shorter loan maturities than loans made to non-restating firms. This finding suggests that banks are aware of and responsive to borrowers’ ongoing financial misreporting. In contrast, equity holders do not respond differently to earnings announcements of restating firms than to those of non-restating firms. I also do not find an increase in analyst forecast dispersion for restating firms during the misreporting period. In addition, bondholders do not price new bond issues differently for restating and non-restating firms. Taken together, these empirical findings suggest that banks possess private information about ongoing financial misreporting by borrowers, which allows them to adapt their decisions more quickly than equity investors, financial analysts, and public debtholders.
Issue Date: 2012-09-18
URI: http://hdl.handle.net/2142/34242
Rights Information: Copyright 2012 Po-Chang Chen
Date Available in IDEALS: 2012-09-18
Date Deposited: 2012-08
 

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