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How Does Financial Misreporting Impact Borrower Reputation?

Authors

Sudheer Chava, Georgia Institute of Technology
Kershen Huang, Nova Southeastern University
Shane A. Johnson, Texas A&M University

Research Questions Addressed

How does deliberate financial misreporting impact a firm’s reputation and its ability to secure low-cost loans?

How long does it take a firm to rebuild its reputation following an act of deliberate misreporting?

Does additional effort improve a firm’s ability to restore its reputation after misreporting?

Primary Findings

Firms that deliberately misreport financial information pay significantly higher interest rates than firms that truthfully report their finances.

Higher interest rates for misreporting firms are maintained for at least six years after the misreporting is identified. Furthermore, the interest rate premium paid by misreporting firms does not decrease over that same period.

Actions that misreporting firms take to restore their reputation do not result in a decrease in the interest rate premium.

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