HCBE Faculty Articles

Title

The Dynamics of Borrower Reputation Following Financial Misreporting

Document Type

Article

Date

10-2018

Publication Title

Management Science

ISSN or ISBN

1526-5501

Volume

64

Issue

10

First Page

4775

Last Page

4797

Description

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.

DOI

10.1287/mnsc.2017.2739

Peer Reviewed

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