Do Restatement Borrowing Firms Benefit From Board Tie with Lending Banks?

Abstract

Accounting restatements cast doubt on information credibility. Therefore, bank loan lenders have to devote more effort to information collection and monitoring. In this context, board ties with lending banks, where respective directors of borrowers and lenders attended college or previously worked together, can potentially benefit restatement borrowers by facilitating information flow or effective monitoring. Using matched sample difference-in-difference (DID) approach, my sample includes bank loans borrowed by restatement firms and non-restatement matching firms, in the pre- and post- restatement periods. Evidence shows that the existence of having board tie with lending banks helps to mitigate the higher bank loan cost suffered by restatement borrowers after restatement. Such result is mainly driven by more severe irregularity-related restatement and board tie with lead arranger in syndicate. However, the loan cost benefits come with additional costs. Lending banks, when connected by board tie with restatement borrower, tend to impose even more covenants than other lenders, suggesting they substitute interest rate concessions for more covenant restrictions to exercise ex-post control.